Introduction

Good morning, I am excited to welcome you to the third Market Risk Advisory Committee (MRAC) meeting of 2023. On March 8, 2023, MRAC held a first-of-its kind convening in the wake of one of the most concerning cyber attacks in our markets in recent years. The entity at the center of the cyber incident, ION, is not a CFTC-registered market participant; rather ION is a mission critical third-party service provider.

We had thoughtful discussions at the March 8, 2023 MRAC meeting led by former CFTC Commissioners, executive experts from the White House Office of the National Cyber Director, the Presidents and CEOs of the largest industry trade associations in markets, as well as public interest and consumer protection advocates. In July of 2023, MRAC led the Commission’s advisory committees in formally announcing workstreams of two longstanding and valuable subcommittees: the Market Structure and CCP Risk and Governance subcommittees. We will hear reports from these Subcommittees regarding progress on seven workstreams later this morning.

Today, we continue the long tradition of this Committee’s engagement with the Commission, its valuable insight into the concerns that shape the stability and integrity of global derivatives markets, and its collaboration toward developing ways that the industry and the Commission can prepare for and mitigate the most critical risks facing our markets today. The work of this Committee influences industry standards and best practices and provides thought leadership on many of the most important issues that will impact citizens and businesses in every corner of the world by shaping the direction of the development of markets.

Today, we have a very ambitious meeting planned. Our agenda will begin with presentations from the seven workstreams currently operating in two of the MRAC subcommittees—CCP Risk and Governance and Market Structure. Although the final two subcommittees—Climate-Related Market Risk and Future of Finance—will present at the end of our agenda, it is worth opening with a preview of the issues that these two subcommittees will begin to explore in 2024.

Climate-Related Market Risk

Tomorrow will mark the conclusion of the 2023 United Nations Climate Change Conference, known as COP28. Notwithstanding the dusting of snow here in Washington, D.C. this morning cooling us off, 2023 will be the hottest year on record. In fact, according to a recent report from the World Meteorological Organization, the past nine years have been the nine warmest years on record, and mean temperatures are now 1.4 degrees Celsius above the average from the second half of the 19th century.[1] Concentration of greenhouse gases are at record levels and ocean heat is at its highest level in the 65-year observational record.[2]

The Biden administration is taking steps to limit anthropogenic climate change. At COP28, the U.S. Treasury announced a pledge of $3 billion to the Green Climate Fund, a UN-based fund designed to assist developing countries with adapting to and mitigating climate change.[3] The Environmental Protection Agency (EPA) announced a new final rule eliminating the flaring of natural gas by new oil wells, requiring companies to monitor and repair methane leaks from well sites, and imposing new emissions standards for high-emitting equipment.[4] The new rule will also create a program to detect “super emitters,” which the EPA says account for almost half of oil and gas sector methane emissions.[5]

It is imperative that the CFTC do its part, and we have marked a first step in the right direction in the voluntary carbon offset market. Last week, I shared my support for the Commission’s proposed guidance with respect to the listing of voluntary carbon credit (VCC) derivative contracts on designated contract markets (DCMs). There are deep and persistent concerns regarding the integrity, credibility, and lack of visibility in the market for VCCs. As I recently noted,

[w]hile the issues and concerns regarding climate risks are endemic, complex, and inherently require multi-lateral solutions effectuated by an international coalition of stakeholders—let’s call it: a coalition of the willing—I strongly believe that financial market regulators and committed market participants may play a pivotal role in developing and implementing some basic, foundational market reforms.[6]

I expressed an urgent need to explore these issues in a recent speech at the Federal Reserve Bank of Dallas. In short, we must begin “to address transparency, additionality, risk of reversal, robust quantification, governance, tracking and double counting, inspection provisions, and sustainable development benefits and safeguards.”[7]

The Future of Finance

A second subcommittee will launch several additional workstreams in 2024. At MRAC meetings over the last year and a half, we have consistently advanced a dialogue that will help us to define these workstreams.

Last week while London, I offered remarks at the Financial Times Crypto and Digital Assets Summit about the need for the crypto industry to grapple with market risks. In particular, my remarks explored vertical integration; corporate governance and risk management measures; and cyber security and operational resilience in digital asset markets.

Vertical integration is not new, nor is it unique to digital asset markets. Traditional financial markets, with proper oversight, have identified significant advantages to vertical integration, such as greater efficiencies, reduced costs, and more control along the manufacturing or distribution process.

CFTC regulations impose myriad obligations on firms that adopt vertical integration—such as capital requirements, systems safeguards, know-your-customer procedures, and segregation of customer funds—that have been refined over the course of decades. Without regulation or registration, however, there are notable risks in permitting unsupervised adoption of vertical integration. In fact, vertical integration without proper oversight arguably contributed significantly to customer losses resulting from the collapse and bankruptcy of digital asset derivative platform FTX.com.

Last fall, the Financial Stability Oversight Council (FSOC) called on regulatory agencies to thoroughly analyze the impact of vertical integration and determine whether it is a model that should be supported by existing laws.[8] I look forward to hearing what the members of MRAC determine in the coming year.

The Commission likewise has acted through its Division of Enforcement to begin to reform crypto-economy corporate governance and risk management. The recent landmark case against affiliated Binance entities and its former CEO and former CCO grabbed headlines with its $4.35 billion in total financial sanctions, but truly broke new ground in the way that it shaped the company itself. The resolution required Binance to implement corporate governance and compliance reforms—independent board members, anti-money laundering and know your customer procedures, and required onboarding—that, on their own, are not unique to CFTC enforcement actions.[9]

As announced by the Commission last week, this Wednesday the Commission will debate and vote on a new proposed rule authored by our Market Participants Division governing operational resilience of registered entities.[10] The rule seeks to harmonize guidance from standard-setting organizations with pre-existing regulations from both the CFTC and prudential and international regulatory authorities. The goal of the rule is to strengthen the integrity of our markets by strengthening its component participants against all manner of disruptions to ongoing business, from such disparate sources as power outages, pandemics, and phishing cyberattacks.

The use of distributed ledger technology can itself improve a company’s operational resilience by dispersing critical functions of financial transactions across multiple nodes, and by the use of cryptography intrinsically built into the functioning of the blockchain. But it is not infallible.

Chainalysis’s annual Crypto Crime Report in February described that “2022 was the biggest ever year for crypto hacking, with $3.8 billion stolen from cryptocurrency businesses.”[11] October 2022 alone saw the theft of $775.7 million stolen in 32 separate hacking attacks.[12] Decentralized Finance (DeFi) protocols were by far the most victimized, and 64% of the $3.1 billion stolen from DeFi companies were extracted from cross-chain bridges, which are protocols that allow users to move digital assets from one blockchain to another.[13] Cybercriminals will exploit vulnerabilities wherever they might be found.

Turning to our agenda, building on our productive dialogue over the last year and a half, I would like to express my gratitude to today’s speakers who will introduce and advance these critical topics and our efforts.

CCP Risk and Governance

Our agenda today begins with a discussion that outlines several of the most critical issues facing global financial markets. We are fortunate to have Christopher Hayward, Policy Chair for the City of London Corporation, join us to share an important announcement regarding opportunities for my office and the Commodity Futures Trading Commission to enhance our collaboration in the coming years. My office has benefited from roundtable discussion and policy dialogues organized by the City of London in London and here in Washington, D.C.

Mr. Hayward will be joined by Klaus Löber, Chair of the European Securities and Markets Authority’s CCP Supervisory Committee. Finally, Richard Haynes, Deputy Director of the Risk Surveillance Branch in the Division of Clearing and Risk (DCR) at the CFTC will offer insights that anchor the discussion.

We will then turn to the presentations from the Central Counterparty Risk and Governance Subcommittee, co-chaired by Alessandro Cocco, Senior Policy Advisor on detail at the Department of Treasury, Chris Edmonds, Chief Development Officer at Intercontinental Exchange, and Alicia Crighton, Chair of the FIA Board. As discussed at the last MRAC meeting in July, this Subcommittee currently has three workstreams covering (1) technology and operations, (2) recovery and resolution, and (3) margin and collateral.

We will begin this Part of the agenda with a presentation from the technology and operations workstream. Lee Betsill, Managing Director and Chief Risk Officer of CME Group, will examine the adoption of the regulatory structure surrounding legal entity identifiers. In addition, this portion of the agenda will begin to outline a new workstream that will examine mission critical third-party vendors.[14] 

As I mentioned earlier, later this week MPD will propose updates to existing operational resilience rules.  The amendments seek to ensure that covered entities must identify, monitor, manage, and assess risks posed by their use of critical third parties to handle all manner of their covered business activities, as diverse as margin processing, risk management, human resources, and information technology. Firms’ cybersecurity will be defined not only by what they do to protect their own facilities from direct attacks, but also by how they prepare for the inevitable business disruption caused by cyberattacks on their critical contractors and subcontractors.

This proposed rule, however, does not apply to CCPs.

FSOC, whose annual reports outline potential emerging threats and vulnerabilities, most recently noted the dangers to the financial system presented by underexamined cybersecurity at CCPs:

A grave cybersecurity incident could potentially threaten the stability of the U.S. financial system through at least three channels: (1) disrupting key institutions with few or no substitutes, such as central banks, exchanges, payment clearing and settlement systems, or other critical service providers; (2) compromising the integrity of data that is critical to the stable functioning of financial firms and the system; and (3) causing a loss of confidence among a broad set of market participants.[15]

FSOC continued: “Maintaining and improving the cybersecurity resilience of the financial sector requires continuous assessment of cyber vulnerabilities and close cooperation across firms and governments within the U.S. and internationally.”[16]

I am thus asking the CCP Risk & Governance subcommittee to focus a workstream on studying CCP third-party risk and devising what recommendations, if any, the MRAC parent committee might make to the Commission to shape the development of relevant rules.

Two expert presenters will join us for this discussion to provide their extensive expertise on this very important topic: Julie Mohr, Deputy Director of the CFTC’s Division of Clearing and Risk’s Examinations Branch and Don Byron, Senior Vice President and Head of Global Industry Operations and Execution at Futures Industry Association.

Next, Alessandro Cocco, and Juan Blackwell, Head of Credit and Counterparty Risk Management at Ontario Teachers’ Pension Plan, will describe the progress of the recovery and resolution workstream including a discussion on resilience as a first line of defense, liquidity, international harmonization, and transparency. Finally, for this segment of the agenda Bob Wasserman, Chief Counsel of the CFTC’s DCR, will share insights from the Commission’s development of this proposed rule.

Closing this Part of the agenda, Dmitrij Senko will share reflections on the efforts of the margin and collateral workstream. The workstream has been focused on four specific areas: margin transparency, anti-procyclicality, margin period of risk, and collateral margin calls.

With sincerest gratitude, I would like to acknowledge the leadership of Co-Chairs Cocco, Crighton, and Edmonds as well as each of the CCP Risk and Governance Subcommittee members. We look forward to your presentations and future recommendations for the agency as we continue to evaluate and improve upon the regulatory framework for central counterparties.

Market Structure

Next, we will hear presentations from members of the Market Structure Subcommittee, co-chaired by Ann Battle, Senior Counsel, Market Transitions & Head of Benchmark Reform at ISDA, and Biswarup Chatterjee, Managing Director and Head of Innovation for the Global Markets Division at Citigroup. As discussed during the last MRAC meeting in July, this subcommittee stood up four workstreams to guide its work over the last five months.

First, Ashwini Panse, Head of Risk Oversight for ICE Clear Netherlands and Chief Risk Officer for the North American Clearinghouses, will present on the results of the workstream’s analysis of CFTC FCM data, and preliminary conclusions on FCM capacity and concentration, that may inform a recommendation in the near-term. Following that, we will have several presentations related to Market Structure’s Treasury Market Reform workstream. Co-Chair Battle will provide an update on the workstream’s plan to study and prepare potential recommendations related to the U.S. Treasury basis trade or U.S. Treasury cash–futures trade, and Jennifer Han, Chief Counsel and Head of Global Regulatory Affairs at the Managed Funds Association, will present on a primer on treasury market structure recently published by MFA. We will also welcome in an external speaker in Samuel Schulhofer-Wohl, Senior Vice President and Senior Advisor to the President at the Federal Reserve Bank of Dallas.

Co-Chair Battle will also present an update for the block workstream focusing on preliminary feedback on a request for analysis of block market participants prepared by the workstream. Finally, Guy Rowcliffe, Co-CEO and Chief Commercial Officer of OSTTRA, will join remotely to provide an update on the work of the post-trade risk reduction workstream.

I would like to express my appreciation to co-chairs Battle and Chatterjee, our workstream leads, and each of the Market Structure Subcommittee members for their continued work in these areas.

New MRAC Subcommittees

To end the meeting, we focus on the two subcommittees that will begin their work in 2024, the subcommittees I began my remarks discussing: Climate-Related Market Risk and Future of Finance. We will hear from Tamika Bent, my Chief Counsel and Designated Federal Officer for MRAC, who will describe the Commission’s Proposed Guidance on VCCs, as well as a potential workstream that the MRAC’s Climate-Related Market Risk subcommittee anticipates launching in 2024.

Tamika’s remarks on the Proposed Guidance will be followed by remarks from Kerstin Mathias, Director of Policy and Innovation for the City of London Corporation. Kerstin will provide an international perspective on these issues, including efforts to harmonize climate disclosure obligations, planning for private sector transition to net-zero carbon emissions, international governance initiatives for voluntary carbon credits, and ways to harness G7 and G20 to coordinate a commitment to sustainability.

In connection with work that the Future of Finance subcommittee will begin in 2024, we will hear from two impressive individuals whose careers are focused on the innovation and evolution of our financial markets. The first presenter will be an external speaker, Jai Massari, Co-Founder and Chief Legal Officer of Lightspark. Jai will speak on these three critical issues of vertical integration, corporate governance and risk management, and cybersecurity. She will also address the concept of a potentially new use of blockchain technology: verified credentials, a digitally-native, non-governmental form of identification that is owned and controlled by the individual.

Our second presenter will be MRAC member Kevin Werbach, Liem Sioe Liong / First Pacific Company Professor, Professor of Legal Studies and Business Ethics, and department chair at the Wharton School. Kevin will offer guidance on best practices for risk management in digital asset trading, including fraud detection, anti-money laundering, and risk analytics, and the ways that blockchain technology can be used to inform regulation. He will also talk about the market risks posed by artificial intelligence: leakage of private data, risks posed by autonomous AI trading agents, and the systemic risk of generative AI using the same foundation models.

Conclusion

This meeting is an opportunity to roll up our sleeves and begin to chart a course for the development and completion of the important work that the MRAC Subcommittees have and will explore. I am hopeful for an open and meaningful discussion among MRAC members regarding the critical issues facing our markets.

Allow me to thank our MRAC Chair and Chair of the FIA Board, Alicia Crighton; MRAC Designated Federal Officer (DFO) Tamika Bent; and MRAC Alternate DFO Peter Janowski. I also thank each of the ADFOs who support MRAC—Daniel O’Connell and Parisa Nouri—and senior counsel on my staff Julia Welch.

I’d like to thank Commissioner Mersinger for participating today and for her contributions to this discussion. I also want to thank the CFTC logistics and administrative staff and contractors who ensured that our physical conference room and our virtual conference room were ready to go for our members and our invited speakers, including Altonio Downing, Phyllis Campbell, Monae Mills, Andy Brighton, Keane McBride, Venise Raphael-Constant, Margie Yates, Jean Cespedes, Pete Santos, and Ty Poole.

Thank you so much for joining us today. With that, I will turn it over to Commissioner Mersinger for her remarks. I look forward to a robust and informative discussion.

[1] World Meteorological Organization, Provisional State of the Global Climate in 2023, at 2 (Nov. 30, 2023), https://wmo.int/files/provisional-state-of-global-climate-2023.

[2] Id.

[3] Press Release, U.S. Department of the Treasury, Announcement of Pledge to Second Replenishment of the Green Climate Fund (Dec. 2, 2023), https://home.treasury.gov/news/press-releases/jy1942.

[4] Press Release, U.S. Environmental Protection Agency, Biden-Harris Administration Finalizes Standards to Slash Methane Pollution, Combat Climate Change, Protect Health, and Bolster American Innovation (Dec. 2, 2023), https://www.epa.gov/newsreleases/biden-harris-administration-finalizes-standards-slash-methane-pollution-combat-climate.

[5] Id.

[6] Kristin N. Johnson, Commissioner, CFTC, All Hat, No Cattle: The Need for Market Structure Reforms in Voluntary Carbon Markets (Nov. 29, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson9a.

[7] Kristin N. Johnson, Commissioner, CFTC, Commission Guidance Regarding Listing of Voluntary Carbon Credit Derivative Contracts (Dec. 4, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement120423.

[8] Financial Stability Oversight Council, Report on Digital Asset Financial Stability Risks and Regulation, at 117–19 (Oct. 3, 2022), https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.

[9] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding CFTC’s Landmark Resolution of Charges against Binance and Its CEO and CCO (Nov. 21, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement112123.

[10] Events, CFTC, CFTC to Hold a Commission Open Meeting on December 13, https://www.cftc.gov/PressRoom/Events/opaeventopenmeeting121323 (last visited Dec. 11, 2023).

[11] Chainalysis, The 2023 Crypto Crime Report, at 56 (Feb. 2023), https://go.chainalysis.com/2023-crypto-crime-report.html.

[12] Id.

[13] Id. at 58.

[14] C.f., Kristin N. Johnson, Commissioner, CFTC, Opening Statement Before the Market Risk Advisory Committee Meeting (Mar. 8, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement030823.

[15] Financial Stability Oversight Council, 2022 Annual Report, at 11 (Dec. 16, 2022), https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf.

[16] Id.