Remarks of Chairman J. Christopher Giancarlo before the Global Forum for Derivatives Markets 38th Annual Bürgenstock Conference
Lucerne, Switzerland - September 12, 2017
Good evening, ladies and gentlemen. Thank you for your warm welcome.
It is good to be at the famous Bürgenstock Hotel that has hosted so many famous actors and actresses from Sophia Loren to Sean Connery.
Several of the James Bond movies were filmed in this area. Any minute, I expect to bump into one of the movie characters. Perhaps, like me, your favorite was Auric Goldfinger. I can already hear the theme music. Goldfinger’s headquarters were supposedly nearby.
I thank our hosts, the International Commodities and Derivatives Association, and especially Dan Day-Robinson, its Chairman, for bringing sparkle and glamour back to the dry work of financial market regulation!
It was at the 35th Annual Bürgenstock Conference, then in Geneva in 2014, that I gave my first address outside the U.S. as a newly appointed CFTC Commissioner.
Geneva was the site of one of the most famous literary evenings in history, specifically, the shore of Lake Geneva. There, in a dark and dry villa, one hundred and one years ago, on a stormy, tempestuous, and rainy night, the poets Shelley and Byron, along with Mary Shelley and others, passed the evening by the fire telling terrifying ghost stories. One of those stories became the novel Frankenstein.
Global Swaps Reform
You and I could rival them with our own ghost story, which continues to haunt the U.S. and the global markets: the frightening financial crisis of 2008! Only it was real, substantial, and powerfully rippled out to touch markets everywhere, including Switzerland.
Here is another haunting event: that ripple effect had a powerful undertow. This month marks the 9th anniversary of the Lehman Brothers bankruptcy.
It also marks the eighth anniversary of the Pittsburgh G-20 Summit. At that critical meeting, we were like the villagers mobilized to fight the Frankenstein monster. We confronted our fears and acted together. The torches were lit, the castle breached, and the monster slayed. And, order was slowly restored.
Global leaders agreed to work together to support economic recovery through a “Framework for Strong, Sustainable and Balanced Growth.”1 The G-20 leaders agreed upon several fundamental principles to reform over-the-counter derivatives markets. They pledged to work together to “implement global standards” in financial markets, while rejecting “protectionism.”2
Please notice I stress our joint efforts at that time. Our unity – our partnership – was instrumental to agreement.
And, since then, much work has been done to implement those principles for swaps market reform.
The U.S. jumped out first, implementing most of the reforms by 2013 through Title VII of the Dodd-Frank Act. In Europe, swaps market reform was first implemented in the form of EMIR, to be followed by MIFID II, which is scheduled to come on line in a few months.
At the 35th Annual Bürgenstock Conference, I said that the best route to regulating swaps trading in global markets is not regulatory uniformity. I said that the best route is through deference to home country regulators within the Pittsburgh G-20 framework, especially in matters of market practices, transparency and price formation that have little to do with preventing global systemic risk. I encouraged us, as regulators, to build a cross-border regulatory relationship in the spirit of the Pittsburgh G-20 accords.
I also said that flourishing capital markets are the answer to U.S. and European 21st century economic woes. The solution to sluggish growth and stagnant wages in the developed economies was then, and remains today, safe, sound, sustainable, secure, and vibrant global markets for finance and investment. We must implement reform in ways that enhance the vitality, liquidity and durability of global financial markets.
We reached an accord on clearing in the spring of 2016. This agreement on CCP equivalence between the CFTC and the European Commission (EC) was an important signal to the markets and the international regulatory community. It signaled the ability of the U.S. and Europe to work together successfully on critical cross-border issues. It has contributed to stronger and more productive relations between the CFTC and its European and other overseas regulatory counterparts. In that spirit, I expect we will soon reach an accord on how to regulate swaps execution in a harmonious manner across jurisdictions.
Cross-Border Clearinghouse Supervision
So, now let’s move forward in time. In June of this year, the EC proposed an amendment of EMIR to regulate third-country CCPs, including a process to introduce a CCP location policy. This amendment follows in the wake of the UK’s Brexit referendum.
I am respectful of the fact that this is an important regulatory policy development that needs to be made with care by European officials. I fully understand that Brexit raises new and challenging issues for how Europe regulates its financial markets.
Nevertheless – whatever the outcome of the Brexit negotiations and the EU’s internal discussions about how to supervise CCPs – I would consider any unilateral change by EU authorities to the CFTC-EC Equivalence Agreement to be a violation of trust and cooperation between the U.S. and Europe.
If Brexit is indeed the trigger for a new approach in Europe regarding the supervision of cross-border CCPs, then it must be an approach developed with the cooperation and support of the CFTC – cooperation and support the CFTC is prepared to offer. If the EU must reconsider its approach to cross-border supervision of systemically important CCPs, then we cannot have piecemeal and contradictory rulemaking. Instead, we should together strive for a comprehensive and universal solution that supports strong cross-border markets, recognizes and builds upon the strengths of our respective supervisory programs, and preserves as much as possible the basic tenets of the CFTC-EC Equivalence Agreement.
Swaps Reform Version 2.0
In many ways, regulatory frameworks are like software applications. They are a set of rules and algorithms that direct action to certain desired ends. Some regulatory frameworks work well out of the box and attract a broad base of users. Others are plagued with bugs and flaws. Flaws that, if not addressed, fail to attract those not otherwise subject to required usage.
Like software users, market participants will always look to participate in well-designed, regulatory frameworks. Trading counterparties seek neither the least nor the most regulated marketplaces, but market places that have the right balance of sensible, objective and reliable regulation – in other words: good software. A perfect example of this is Britain’s efficient and user-friendly regulation of Fintech that has attracted to London a new generation of technology innovators and the jobs and investment they bring.
The CFTC was the first to implement most of the G-20 swaps reforms. You might call that CFTC framework “Swaps Reform Version 1.0.” We now have more than four years of experience with its varied strengths and shortcomings. CFTC Version 1.0 contains the basic functionality of the Pittsburgh G-20 swaps reforms, but it has some serious bugs and flaws, most critically its inhibition of robust trading liquidity, participant diversity and market vibrancy.
I intend to advance the cause of swaps market reform. We will pursue improvements to the CFTC version 1.0 swaps regulations. These changes will stay true to the Pittsburgh G-20 reforms and be in full accordance with the letter and spirit of the Dodd-Frank Act. Yet, they will incorporate lessons from our initial reform efforts into a new and better framework.3 The new framework, CFTC Swaps Reform Version 2.0, will be engineered to better enhance market durability, increase trading liquidity and stimulate broad-based economic growth and revival.
21st Century Market Regulation
At the same time that we update and refresh our regulatory response to the last crisis, we must also keep abreast of the challenges of ever-changing markets and technologies.
The world is changing. The old financial markets are gone. The electronification of markets over the past decade and the advent of exponential growth in digital technologies have altered trading, markets and the entire financial landscape with far-ranging implications for capital formation and risk transfer.
In order to be an effective market regulator, we must keep pace with these changes or our regulations will become outdated and ineffective.
So, the CFTC recently launched an initiative called LabCFTC. Its purpose is to help bridge the gap from where we are today to where we need to be: a 21st century regulator for 21st century digital markets.
So, in conclusion, the essential role of global derivatives markets is to help moderate price, supply and other commercial risks – shifting risk to those who can best bear it from those who cannot. Our markets help free up capital for business lending and investment that are necessary for economic growth, job creation and prosperity.
More than ever, the time has come to fix flawed implementation of regulatory reform.
These regulatory flaws are like the Frankenstein monster: built with good intentions out of multiple parts, but an aberration, unnecessary, never quite working in harmony, always unnatural and misfit, and ultimately ending in doom.
Vibrant and intelligently regulated derivatives markets are the answer to U.S. and global economic woes, not diminished trading and risk transfer.
We must foster safe, sound and vibrant markets for investment and risk management if we are ever to escape prolonged economic stagnation, and to exorcize the specters of the 2008 financial crisis. I look forward to working with all of you in this effort.
1 G-20 Leaders’ Statement, The Pittsburgh Summit, Sept. 24-25, 2009 at p. 2, available at
2 Id. at 7.
3 See generally: CFTC Commissioner J. Christopher Giancarlo, “Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank” (Jan. 29, 2015) (White Paper), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf, asserting that there is a fundamental mismatch between the distinct liquidity and trading dynamics of the global swaps markets and the CFTC’s over-engineered, futures-oriented swaps trading regulatory framework. The White Paper identifies a number of adverse consequences of the CFTC’s flawed swaps trading rules, including, fragmentation of swaps trading into numerous artificial market segments and increasing market liquidity risk, market fragility and the systemic risk that G-20 regulatory reform was predicated on reducing.
Last Updated: September 18, 2017