Keynote of Commissioner Rostin Behnam at the FIA 40th Annual Law & Compliance Division Conference on the Regulation of Futures, Derivatives and OTC Products, Washington, DC

Our Charming Ways

 

May 3, 2018

 

Introduction

 

Good morning.  It’s great to be with you today.  Before I begin, I want to extend my thanks to Walt Lukken and the entire FIA team for inviting me to share my thoughts.  Also, let me say that the views I express are my own and do not represent the views of the Commission.  As many of you know I worked on Capitol Hill between 2011 and 2017.  As far as I can remember, FIA usually held its annual Law & Compliance (L&C) meeting in Baltimore.  Despite the relatively short distance between Washington, D.C. and Baltimore, I sadly never attended the conference.  My job rarely afforded an opportunity to stray far from the congressional campus — even for a few hours, particularly when the Senate was in session.

 

Now a CFTC Commissioner, and more importantly, a proud, and relatively new resident of Baltimore, having left the District with my wife and newborn in November, 2016, Law & Compliance has conveniently settled, I think, in D.C.; and Walt— also conveniently — offered me the 8:15 a.m. speaking slot.  I could not have planned my L&C debut any worse.

 

Honestly, though, I love early mornings, and I am thrilled to be here to share my thoughts on policy and current events at the CFTC.  But, not before I make a pitch for Charm City.  Baltimore is a scrappy city, and has for over 100 years been one of our nation’s great hubs for the financial services industry, and would welcome Law and Compliance back with open arms.

 

The FIA L&C conference has a strong reputation as the premier legal conference for the derivatives industry.  While it may not offer the sweet salty air of Boca, the views of Dana Point, or the historic charm of the Brewery on Chiswell Street, every year since 1978, regardless of its location, L&C has served as a hive of activity for legal and compliance professionals to share, learn, and explore the legal and regulatory issues of the day.

 

This year marks L&C’s 40^th anniversary, having grown from a gathering of few dozen in the early years to nearly 900 attendees annually.  As I learned from the FIA website, in the beginning, industry professionals were “grappling with a new regulator, a new regulatory environment and understanding how newly adopted and proposed regulations would affect commodities futures contracts.”[1]  In many respects, the same could be said for where we are today.  We just need to use that trick where we add “and swaps” to the end clause of the statement.  If only regulatory reform were that simple.  Joking aside, while the CFTC isn’t a new regulator per se, it is a new regulator for many (new) industry practitioners and participants, and it is becoming a relevant regulator in some newer, emerging areas.  And, as I will touch upon in a little bit, we are eight years into implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act,[2] and we are still evaluating and refining the “new” regulatory environment.  I also suppose “grappling” still fairly describes where we are, at least with respect to some of the more challenging issues of our time.

 

Chairman Giancarlo graciously swore me in as a Commissioner nearly eight months ago to the day.  Pretty remarkable to think it has already been eight months.  If these first eight months are an indication of how quickly my term will come and go, then I’ve got to keep moving if we are going to meet the Chairman’s agenda.  I might need to learn to love my mornings even earlier.

 

As I thought about my remarks, and reflected on the first eight months of my time at the CFTC, a few events came to mind: (i) my maiden speech at Georgetown University; (ii) the listing of bitcoin futures and the increasingly rapid proliferation of financial technology; (iii) participating in the FIA/SIFMA AMG Annual Asset Management Derivatives Forum; (iv) convening the Market Risk Advisory Committee (MRAC); and (v) the first Project KISS and Reg Reform 2.0 initiatives.  As I continue to refine my approach as a Commissioner and formulate strategies in support of goals and priorities, these first events will serve as both developmental milestones and guideposts for tackling our agenda in the months and years to come.  The derivatives industry is vast and diverse, and yet through its ecosystem of industry groups, trade associations, self-regulatory organizations (SROs), and the National Futures Association (NFA), it provides meaningful collaboration, education, and feedback as we continually grow and re-evaluate efforts towards ensuring the safety and integrity of our markets, customer protections, and the professionalism of our market participants.

 

It’s this last point that segues into my actual remarks.  To be blunt, there is a lot going on right now.  It’s important that we continue to collaborate, focus on transparency, and act responsibly.   The Commission and industry must move in tandem as we move forward on the ambitious timetable before us.  While I am optimistic and supportive of our leadership, I will continue to insist that we listen to our constituents and the broader markets and general public in determining how best to serve our purpose and achieve our mission.  We cannot eschew and ignore process and progress in a rush to indulge in initiatives that respond to the rhetoric of the moment.  Doing so could undermine sound policy, create greater uncertainty and impracticability regarding our rules, and leave us vulnerable to creating regulation by enforcement.

 

Last month, during my “Washington Outlook” at FIA Boca, I made clear that we are all in this together.[3]  We’ve been waiting for deliverables in terms of Project KISS, Reg Reform 2.0, and CFTC and SEC harmonization, and anticipating resolution of unfinished business in terms of the de Minimis exception, position limits, capital, and Regulation Automated Trading (Reg AT).  Since that time, we’ve received the Chairman’s white paper on “Swaps Regulation Version 2.0,” which purports to set the agenda for Reg Reform 2.0.[4]  While I appreciate the Chairman’s transparency in setting forth his vision and, in his words, starting a dialogue, I can’t help but note that there is already a process for dialogue with market participants regarding potential rule changes – the notice and comment process for proposed rules under the Administrative Procedure Act.  Adding another white paper just pushes back the timeline for getting to actual deliverables.  It adds another step to the process.  It also takes a lot of staff time when budgets are tight.

 

I know that the natural information asymmetries are at work and that you are all working to solidify what the path forward for the balance of 2018 may look like for you and those you represent.  I am here today to let you know that I continue to believe we must focus on reform and be wary of huge and potentially premature policy shifts; strive for accountability, and continue to have productive dialogs aimed at ensuring that the Commission serves its purpose and remains true to its mission.  With that in mind, I will use the remainder of my remarks to elaborate using my milestone markers.

 

The Maiden Speech

 

Admittedly, I tend to share my views directly with market participants, end-users, and the public instead of making prepared public remarks.  However, I realize that in terms of broader messaging, I may need to provide a little more background.

 

I gave my first public remarks at Georgetown University in November, 2017.[5]  Briefly, I observed that the CFTC is at an inflection point.  I suggested that the CFTC, having largely completed its rulemaking requirements under Title VII of the Dodd-Frank Act, is settling in to its new post-crisis role as a world class regulator of futures, options, and swaps (see how I did that there?).  The CFTC — despite rhetoric of regulatory rollbacks here in D.C. and economic tailwinds — should primarily focus its limited resources on moving forward and not backward.  Of course, I recognize that detours are necessary to address emerging issues and advancements in our markets.

 

I also stated that the inflection point must include careful reflection on what has been done since 2010.  Any outcome should be a careful, limited fine-tuning and adjustment to reforms that have resulted in unintended consequences or do not further congressional intent or the CFTC’s core mission.  I’ll augment those sentiments today by adding that, as we engage in these exercises, we must be mindful that our rules and policies interconnect in various places, and that each adjustment must be accompanied by sound analysis to ensure that we don’t create misalignments and new uncertainty.  I’ll also add that we must also consider the rules of our fellow domestic regulators, the Securities and Exchange Commission (SEC) and the prudential regulators, and our foreign counterparts.  Our newest registrants operate across jurisdictional lines and we ought not to assume that our rules should trump all others, or that their purposes cannot be met absent the strictest interpretation of compliance.  In adjusting our rules, we should leverage existing regulatory structures and identify synergies that support our goals and meet the highest standards of global regulatory cross-border harmonization.

 

Fintech

 

The last quarter of 2017 gave many of us a hard and fast introduction to Bitcoin and its underlying technology.  Although I had a base understanding of the technology and its potential uses, the rapid rise in crypto-asset prices, and the introduction of Bitcoin futures on two CFTC registered designated contract markets forced a much deeper understanding.  There were many lessons from those weeks and months leading up to the launch of the contracts in December, 2017, and then after when I convened a meeting of the Market Risk Advisory Committee to discuss the self-certification process and crypto-assets in January.  But, one of the most important lessons is that policymakers, including myself, need to prioritize the discussions and policy roadmap for the oversight and regulation of fintech.

 

The experience of overseeing the introduction of the first Bitcoin futures contracts epitomized how regulators and policymakers can end up on the tail of technological advancement, scurrying to keep pace with swift innovations that capture market efficiencies, open the markets to new products and participants, and often reward those willing to take risk.  We’ve been assured by the G20 that financial stability is not yet implicated by the transformative technology underlying crypto-assets, and that any urgency to create new laws and regulations must be tempered by our lack of a full understanding of the promise and perils of this fintech phenomenon.[6]  However, to make sure we firmly catch the tail, I’ve proposed that the U.S., through the multi-member Financial Stability Oversight Council (FSOC), lead the collaborative, interdisciplinary effort to identify and craft an appropriate path forward for ensuring that legal issues resulting from these technologies are identifiable and solvable before they cross the horizon.[7]

 

In 2010, the Dodd-Frank Act created the FSOC as a tool for identifying risks and responding to emerging threats to financial stability.[8]  Accountable to Congress and the American public, the FSOC, Chaired by the Treasury Secretary, includes in its membership representatives from each of the federal financial regulators.  FSOC must play a more direct, inclusive role in the broader fintech economy to effectively capture its breadth and global market impact.  Critically, discussions must move beyond the role of crypto-assets as currency; fintech presents advancement in financial commerce, including payment systems, distributed ledger, artificial intelligence, and identity verification.

 

Given its mandate, the FSOC has authority to (i) convene all key U.S. financial regulators; (ii) establish a mutually agreed lexicon for discussing crypto-assets and related fintech; (iii) convene public hearings; and (iv) propose policy direction and guide jurisdictional responsibility based on input from regulators, stakeholders, academics, and the public.

 

The interests of regulators, the markets, and market participants should be aligned when it comes to building legal certainty.  Anything less than decisive action by policymakers in the short term will leave us all scratching heads, pointing fingers, and asking who, what, when, and how.  The task certainly will not be easy, but complacency by policymakers could lead to industry-led policies and practices that ultimately provide short-term solutions of limited application without including impacted stakeholders and appropriate consumer protections.

 

Those who support the creation of an industry-led self-regulatory organization in the crypto-asset markets clearly recognize the need to fill the regulatory vacuum, but their motives may be too focused on supporting industry growth without being stifled by the perceived bureaucratic stall that regulation may bring.  Nevertheless, their movement towards development of industry standards signals support of the concept of regulation.  Industry buy-in will be critical in achieving the engagement with policymakers needed to ensure that any recommendations and decisions reflect an understanding of fintech and address the concerns and needs of all stakeholders.

 

FIA/SIFMA AMG Forum

 

I took a breather from fintech and headed across the country to meet with--well, actually, first with members of the Federal Reserve Bank of San Francisco and several crypto-asset and fintech pioneers.  But then, I continued down the coast to participate in the annual FIA/SIFMA Asset Management Derivatives Forum in Dana Point, California.  Besides the obvious pleasant memories of spending a few days near the ocean, I am continually heartened by the feedback I received from my prepared remarks at the conference.[9]  In part, I spoke about my position on the CFTC and the SEC efforts to harmonize rules.  Given the large number of dually registered market participants and overlapping policy, there is a real opportunity for the CFTC and SEC to harmonize redundant rules and leave both market participants and regulators in a stronger position. 

 

My message to market participants was clear: let’s work together, have an honest conversation, and seek solutions that focus on an inclusive regulatory landscape.  This ambitious strategy can be achieved by recognizing statutory limitations and congressional intent; leveraging expertise at each of the respective agencies; and maximizing collaboration between the two agencies to ensure each are contributing without duplication.

 

I believe the audience appreciated my message, and I am hopeful that with continued dialogue, results will be delivered.  I’d like to continue to be a part of the conversation and believe a bipartisan solution will not only provide a more thoughtful outcome, but also an outcome that will stand the test of time.

 

I mentioned this particular speech because I do believe harmonization and exhaustive collaboration is critical among regulators.  I believe it is one of our most important responsibilities.  But, I also mention this speech as a proxy for my thinking on all policy issues.  Dialogue, honesty, and transparency are key elements to any relationship, including the relationship between a regulator and its regulated market participants.

 

Whatever your issue, my door is open.  Whatever your concern, my door is open.  Whatever your question, my door is open.  Let’s tackle problems together, and find solutions.  I am not suggesting this is easy.  And we will probably not agree on many things, but moving forward doesn’t necessarily mean getting everything you want in short order.  Small steps count as progress towards future solutions.

 

Market Risk Advisory Committee

 

As I mentioned earlier, as sponsor of the Market Risk Advisory Committee, I convened the Committee in January to provide a public forum for an open dialogue regarding the CFTC’s regulatory self-certification process for new products, specifically those in the crypto-asset space.  Looking forward, I am in the process of renewing the MRAC’s charter, and reconstituting its membership.  I hope to convene the Committee twice more before the year ends.  The MRAC refresh will mean new membership and new issues.  Based on much feedback, the MRAC will focus on current issues involving benchmark risk (specifically the Libor transition), clearinghouse risk, operational risk and third-party service providers, and financial technology risk that can have an impact on the financial stability of our markets.

 

I want the MRAC to be a forum for robust dialogue of wide ranging issues, including those that may not be easy to discuss.  My philosophy is based in well-grounded relationships and transparent conversation.  I believe keeping these two principles in mind provide the best chance to identify problems and provide solutions.

 

Project Kiss & Reg Reform 2.0

 

Shortly after his appointment as Acting Chairman, Chairman Giancarlo announced Project KISS, or “Keep It Simple, Stupid.”[10]  Market participants and even a few law makers have broadly supported its underlying goals of reducing regulatory burdens by making our existing regulations and practices simpler, less burdensome, and less costly.  More recently, the Chairman co-authored and released Reg Reform 2.0, a white paper outlining a future vision for swaps markets.[11]

 

In principle, I support the Chairman’s efforts to reduce regulatory burdens.  I have said as much since becoming a Commissioner, and even earlier in these remarks.  Reflection and improvement have long been woven into the fabric of the CFTC and its entire staff.  We have wide ranging responsibilities to the general public, customers, market participants, and the Congress.  In my view, always seeking to improve and be better regulators is certainly one of those responsibilities.  The Chairman’s initiatives give new names to processes and goals that have long been part of the Commission’s approach to regulation.

 

However, as with any government agency, or private sector business for that matter, the CFTC must work within its means.  The CFTC must always remain focused and vigilant to its core mission and responsibilities, and only undertake significant overhauls when resources allow, or under the most necessary circumstance.  The President recently signed an omnibus spending package for the balance of fiscal year 2018.  The funding level appropriated to the CFTC is $249 million; a decrease of one million dollars from federal year 2017’s funding level of $250 million.[12]

 

Given the President’s request of $281.5 million,[13] the CFTC is in a time of prolonged belt tightening.  We need to utilize the limited resources we have on mission critical issues not major overhauls.  The most important and valuable resource the CFTC has is its dedicated, expert professional staff.

 

I am concerned that as our jurisdiction has significantly grown since 2010, and markets have become more complex and global, we will struggle to be the vigilant cop on the beat we need to be, leaving our nation’s critically important derivatives market and the general public increasingly vulnerable to systemic (and other) risk, and susceptible to fraud and manipulation.  If staff is directed to focus on reworking the broader framework for the swaps market in lieu of fine-tuning and building on the progress we’ve made since 2008, we risk creating greater uncertainty and impracticability at increased costs to market participants.

 

The core reforms are solid, the principles are sound, and markets are functioning well.  As Federal Reserve Board Governor Lael Brainard recently suggested, we cannot afford to begin reassessments before we’ve had the opportunity to evaluate the efficacy of those we’ve already put in place. [14]

 

All this said, I want to emphasize and level set a few things: (i) I want to thank all CFTC staff for their dedication, and commitment to the agency; (ii) I have long supported and will continue to support additional funding for the CFTC; and (iii) I am fully supportive of getting better, and being a better regulator.  Let’s focus on the needs of the day: operational risk, fraud and manipulation; developments in financial technology to name a few.  Project KISS and presumably Reg Reform 2.0 have set the bar high.  Let’s focus on what’s absolutely necessary, and maximize staff resources in a manner that best serves market participants.

 

The National Futures Association

 

Before I wrap things up, I’d like to acknowledge my deepest appreciation for the NFA, our designated registered futures association and the industrywide, self-regulatory organization for the U.S. derivatives industry.  I’d also like to mention two important and timely initiatives aimed at improving our understanding of and ability to oversee participation in the virtual currency markets and further protecting customers and market integrity by raising the standards of professionalism in the swaps market.

 

First, NFA staff is focused on understanding and obtaining information about their members’ activities in underlying/spot virtual currencies and virtual currency derivatives in order to ensure appropriate regulatory oversight of this area.  Since December 2017, NFA has required futures commission merchants (FCMs), commodity pool operators (CPOs), commodity trading advisors (CTAs) and introducing brokers (IBs) to report information relating to their virtual currency activities.[15]^, [16]  The NFA recently informed me that the number of Members trading these products remains relatively flat and modest.  As of March 27th, three FCMs for which NFA is the DSRO, 63 IBs, 35 CPOs and 16 CTAs have reported that their business activities currently involve virtual currency derivatives.

 

NFA staff is working on a proposed Interpretive Notice designed to enhance disclosure requirements for Members that trade underlying/spot virtual currencies and virtual currency derivatives.  The proposed Notice would provide guidance on customer disclosures regarding the risks of trading virtual currency products that should be included in promotional materials, disclosure documents and other offering materials.  NFA's Executive Committee recently approved the Notice and it will be submitted to NFA’s Board later this month.  NFA continues to work with its advisory committees and CFTC staff to finalize and refine the disclosures before submission to the CFTC for final approval.

 

Second, the NFA is in the initial stages of developing an online learning program with an embedded test for swaps professionals.  In his 2015 White Paper, Chairman Giancarlo cited the need to raise the standards of professionalism in the swaps market by establishing requirements for product and market knowledge, professionalism and ethical behavior for swaps market personnel.[17]  NFA's Registration Rules require that associated persons (APs) engaged in futures and forex activities must take and pass proficiency examinations that test both their market knowledge and their knowledge of regulatory requirements.  However, currently, there are no analogous requirements applicable to swaps related activity.  I support a swaps proficiency requirements program and, along with DSIO staff, have agreed to NFA’s proposed approach to develop an examination as part of an internet-based learning program for all APs engaging in swaps activities.[18]

 

NFA is in the initial stages of developing swaps proficiency requirements, and is forming a special advisory committee composed of industry experts from NFA Member firms and other entities that would be impacted by these requirements.  NFA will continue to work with the Commission and the industry throughout this process.

 

Conclusion

 

The CFTC is a unique regulatory agency.  The subject matter is puzzling to most outsiders.  The agency’s history is rich, dating back over a century to American agriculture.  The agency is also relatively small by D.C. standards; but, I think this and its other unique attributes make it rather charming and one of the best in town.  The CFTC has gone through many dramatic changes in the past decade.  Tectonic shifts, one might say.  By in large, the changes have been successful, and the market has responded positively, adjusting to the new regime and adapting to the new rules of the road.

 

As we move forward, let’s reflect on the past, address the unintended consequences, properly calibrate the numbers, and focus on our day-to- day responsibilities of protecting customers, preserving market integrity, and keeping markets safe.  As we move forward into new areas, innovating and evolving with our markets does not mean we must cast aside our charming ways.  Like Baltimore, part of that charm is an understated scrappiness.  We are a resourceful agency that dreams big.  We have tremendous responsibilities, and sometimes must reserve those big dreams for another day.  But, I am confident that as we continue to grapple with the issues of today—and those on the horizon, we will continue to do so responsibly and with the support and buy-in of our industry.