Before beginning my remarks I would like to note that the views I express today are my own and not necessarily those of the Commission I am proud to serve upon, nor my fellow Commissioners.

To state the obvious, the past few months have challenged my quest for predictability.  So I am abandoning this pursuit and acknowledging that the way of a regulator is to consider things that are uncomfortable and respond accordingly.  It’s a service rendered so that others may have greater certainty–a responsibility I am proud to hold, but if I have learned anything since signing on to be a Commissioner of the Commodity Futures Trading Commission (CFTC), it is that you might as well be comfortable with the uncomfortable.  From the onset, my confirmation process was unpredictable (and long), then soon after being confirmed there was the government shutdown that again delayed the agenda I had hoped to pursue on the job, and now an unprecedented health pandemic that has changed the way we all operate.

But the CFTC is forging ahead to overcome today’s unprecedented circumstances in order to achieve our goals.  Since March 13, 2020, the CFTC has held 4 Open Meetings and issued 16 final and proposed rules (representing more than half the rulemakings issued during the past year).  In addition, there have been 4 public meetings of the Commission’s Advisory Committees, with 2 more scheduled during the next two weeks.  And the Staff of the Commission has issued:  i) 3 Customer Advisories and 1 Staff Advisory, relating to Covid-19; and ii) 12 temporary, targeted no-action letters to help facilitate orderly trading and liquidity in the U.S. derivatives markets, and to allow market participants to implement lifesaving social distancing measures, in response to the Covid-19 pandemic.[1]

Even as we are extremely busy, the way I work has certainly changed.  As the past few months have enabled me to spend more time at home and less time traveling, I have found myself binge watching entire television series with my family in the evenings.  My daughter and I have been watching “Once Upon a Time”–a modern-day adventure series that originally ran from 2011 to 2018 and featured many well-known fantasy characters.[2]

Unlike the storybooks we read as children, this is not a compilation of isolated and familiar happy endings.  Rather, it is a drama series in which a collection of traditionally unrelated characters–Snow White, Captain Hook, Rumpelstiltskin - are on a common journey, and the storyline is often unexpected given what we think we know from past experience about these characters (spoiler alert - Peter Pan is a villain).  Frankly, it is sometimes uncomfortable to comprehend this dynamic and unconventional interpretation of age-old tales from which we expect predictable conclusions.  Like the last 20 years of financial regulation, what we think we know and the expectations we set require constant adaptive thinking.

The CFTC’s Derivatives Regulatory Framework

Once upon a time when I moved to Washington to analyze grain prices for U.S. export market development, I could never have imagined where the journey would take me–a stop in the Senate working as an agriculture policy staffer for the Chairman of the Banking Committee provided me a view into the development of legislation that prohibited the CFTC from regulating over-the-counter swaps.[3]  A decade later, I was a Senate Committee staffer tasked with considering new policies for derivatives markets in the midst of the financial crisis, when in 2010 the Dodd-Frank Act directed the CFTC to reverse course and oversee these same swaps.[4]  Now another decade has passed and another crisis has emerged, and once again we must think about things differently to ensure the CFTC can adjust to current circumstances.

Perhaps less well known than other financial services regulatory agencies, once upon a time, the CFTC exclusively regulated futures contracts–grain futures, energy futures, interest rate futures, etc.  As a result of the Dodd-Frank Act, the agency’s authority grew exponentially to oversee a $400 trillion marketplace including both futures and swaps.  Both are used for risk management and/or risk transfer, as well as price discovery for commodities that are an integral part of our daily lives.  Congress believed that infrastructure similar to that providing transparency and counterparty credit risk protection in the futures markets should also be applied to the swaps market.  At the time, Congress recognized that the CFTC would require flexibility in building a new regulated structure for swaps since they were already prevalent in the market, and have characteristics that differ from futures.

As many of the post-financial crisis regulations have now been in place for a number of years, we can evaluate how these measures are working in the face of today’s challenges:

Clearing:  Increased clearing of swaps to remove counterparty credit risk was a key element of the derivatives reforms after the financial crisis.[5]  Since then, the adoption of clearing has been remarkable.  Recent events are perhaps the most significant test since the clearing mandates took effect, and while I acknowledge margin calls in the face of this recent volatility were uncomfortable for many, the infrastructure and its function to reduce counterparty credit risk has proven up to the task.  Now we must build upon this progress and further enhance the utility of clearing by recognizing its global nature through increased alignment and deference with our fellow regulators in other jurisdictions.

Capital:  Post-crisis reforms also dictated changes to the capital requirements for financial institutions.[6]  While more robust capital obligations could be reasonably considered to increase the safety and soundness of the financial system, we must be careful to not do so at the expense of well-functioning markets and deterioration of available counterparties and liquidity.  The recent market volatility included challenges in the treasury markets across cash, futures, and repo activity.  Banks have traditionally served as the primary market-makers in treasury markets–with real–money buyers, such as insurance companies and pension funds, serving as counterparties and depending on the liquidity that banks provide.  At the same time, banks serve as a funding source for market activity with financing through repurchase transactions.  Capital constraints likely curtailed banks’ ability to provide these types of services during recent market events.  The lesson learned is that capital requirements must be balanced to prevent an unfavorable impact on the liquidity of the markets we are attempting to protect.

Reporting:  Obligations to report swap data are another measure instituted after the financial crisis[7] that must continually be reviewed as we examine what is working in the current environment.  Swap data reporting did not previously exist, and mandating the reporting of swap transactions has increased transparency in previously opaque markets.  Yet, swap data reporting has come at a high cost and, unfortunately, has yet to fully deliver on the goal of providing regulators across the globe a clear understanding of swaps market activity.  As regulators, we must refine our current regulations based on our years of experience collecting and working with this data.  We should only require the reporting of swap data elements that have a proven use-case or demonstrated utility to justify their inclusion, and we at the CFTC are currently performing such a review. 

Data Security:  Furthermore, with respect to the CFTC’s data collection in general, it is the duty of regulators to safeguard all of the data we collect from market participants, especially sensitive proprietary and personally identifiable information.  To that end, I am spearheading the Data Protection Initiative within the CFTC to help us better ascertain our regulatory data needs and assure robust internal protection measures.[8]  In today’s environment, data is ever more critical to our markets and our regulatory mission, but the unfortunate threat of data security breaches requires regulatory agencies to evaluate the scope of our data intake needs while also considering the sensitivity of the data and the potential for unauthorized access.  I believe a more structured process and uniform policies and procedures about how to collect, protect, grant access to, respond to breaches regarding, and dispose of data when applicable will foster heightened vigilance that will benefit both regulators and market participants.

I have mentioned only a few things currently under review at the CFTC, but I picked these specific items because I think they demonstrate both areas of success and areas where more work is needed based upon the real-world testing that our regulations are undergoing in the face of an unprecedented pandemic.  In each episode of the TV series, Once Upon a Time, there is a common theme: “Magic comes with a price.”  Put another way, there are consequences to even the most well-intended objectives.  While there is nothing magical about regulating derivatives–it certainly isn’t a fairytale–there is always a tradeoff that needs to be weighed.  Is the outcome of the policy a net positive, or is it endangering the utility of the product itself?  For 20 years, the pendulum has been swinging far to one side and then to the other.   I am pleased that at the CFTC today, we are avoiding the extremes and having a robust dialogue to ensure that our regulations are fit for purpose and not impeding the function of derivatives–which quite simply is to help mortgage providers, pension managers, life insurers, manufacturers, and food providers manage their risks in the face of unpredictability that is today hindering economic recovery.      

The Importance of Female Leaders

Speaking of our economy, I want to touch upon the importance of attracting and retaining female leaders for the benefit of our economy.  This is a subject I have previously addressed, but it is particularly important in the face of unique workplace challenges presented by Covid-19.  Simply put, our economy cannot afford to abandon the progress we have made.  Prior to the pandemic, more and more women were claiming leadership roles–in the board room, in the C-suite, in Congress, and in other decision-making bodies.

For me, getting a seat at the table is less about being a woman and more about knowing that the unique way in which I contribute–because I am a woman–is a value–add.  Let me explain: Like most women, my approach and considerations are inherently different than my male colleagues.  That is not to suggest that my views are always the best ideas - my male colleagues have excellent solutions, too–but by offering an alternative way of considering the challenge, we simply have a broader set of options from which to inform the outcome.  Women and men must embrace each other’s contributions in order to achieve better results.

Why is it so important?  A few years ago, the McKinsey Global Institute produced a study indicating that a setting in which women participate in the economy identically to men could add up to $28 trillion, or 26 percent, to annual global GDP in 2025 compared with a status quo scenario.[9]  S&P Global more recently conducted a data-derived assessment of why gender diversity lends to profitability and economic growth.  Specific to the American workforce, their data suggest that increasing both entry and retention of women, particularly to those professions traditionally filled by men, could present a growth opportunity for the world’s principal economy and the potential to add five to ten percent to nominal GDP within a few decades.[10]  While economic models are constantly being recalibrated in the face of the pandemic, the fact remains that diversity yields alternative ways of considering challenges and broadens the options for solving problems.  Especially today, we cannot afford to limit options.

I believe that both men and women have worked hard to get seats at the table, and now we know that their collective ideas contribute to more productive outcomes.  But in order to capture that productive, diverse viewpoint to the benefit of our economy, women must not only sit at the table but must find their voice at the table.  That requires both men and women to consider getting outside of their norms.  I mentioned that I have a daughter, and I want the benefit of female contribution to be a given, not a statistic, by the time she enters the workforce.  But I also have a son, and I want him to know that his ideas are not only worthwhile, but are made better by seeking a different perspective.  If no one around you challenges your ideas, you likely need to broaden your circle.

Once upon a time, the storybooks suggested that women were either helpless princesses or evil queens.  Those who wish to live happily ever after would be well served to abandon such fairytales.