Keynote Address of Chairman J. Christopher Giancarlo before FIA Annual Meeting, Boca Raton, Florida
March 14, 2018
Thank you. Good morning. Thank you, Walt. It is great to be here at FIA’s 43rdInternational Futures Industry Conference. It is certainly the one annual event that brings together all participants in the global derivatives markets.
So I am delighted to have this opportunity to speak to all of you about our work at the CFTC. Thank you for your attendance.
There is a comment attributed to Isaac Newton. He said that, if he saw farther than others, it was because he stood on the shoulders of giants.
Today, I can’t help but think of one of the giants of the derivatives industry: Leo Melamed. We all see farther because of Leo. Many of you know Leo. Some of his colleagues and friends are here today. We have all, directly or indirectly, been influenced by him.
Leo is the Chairman Emeritus of the CME Group and one of the central figures in American commerce and trade. He has just announced his retirement. In the world of derivatives, he has been a leader who shaped and guided our thinking. In electronic commerce, he actually took us into a new world. He is often called the “father of financial futures.”
Leo Melamed’s vision, brilliance, and accomplishment have spread out from Chicago to include the entire world, a world that began for him with harsh clarity through escaping with his family from Nazi-invaded Poland. Then, the stuff of legend: crossing wartime Siberia by railroad and then by boat to Japan, crossing the Pacific by ship only months before Pearl Harbor. He and his family eventually found safety in America. From there, he stumbled into the world of finance by mistake, yet by pluck and hard work, he thrived and conceived great innovations in trade and commerce. He founded and chaired the NFA from 1982 through 1989, and provided direction and guidance of the Chicago Merc as it grew into one of the great institutions of American finance.
Leo has been a grand figure striding the world’s financial landscape. A consummate professional, a creative visionary. And, what I admire most: a fearless believer in the promise of tomorrow.
Leo dared to define his own future, not have it defined for him. When he started out in Chicago seventy years ago, he found markets that were small, commodity based, and domestic. He leaves markets that are enormous, diversified and international.
And, we are here today - standing on Leo’s shoulders - participating in global derivatives markets that are legacy of a man who was not afraid to envision a brighter and more prosperous future. I dedicate my remarks today to Leo Melamed.
A year ago, I addressed you from this stage. I explained my vision for the CFTC, which is to help foster economic growth, right size the CFTC’s regulatory footprint and enhance our markets. This is a vision much in line with Leo’s legacy.
So, let me review what we’ve done since then and what’s ahead.
Fostering economic growth:
At the CFTC, we have taken several steps to align our work with efforts towards revival of the American economy.
Project Kiss: On February 24, 2017, President Trump issued an Executive Order on “Enforcing the Regulatory Reform Agenda.” Although the CFTC, as an independent agency, is not strictly bound by the Executive Order, I believe that the time has come to re-examine the implementation of our regulations. We established a process to work with the public to identify areas where regulations could be simpler, more coherent, and more understandable. We developed an initiative called “Project KISS,” gathering input both within the agency and from the public. Now, Project KISS is not about changing policy. It's designed to simplify and make our rules and regulations less complex, less costly, less burdensome.
Complex rules are great for the big players in our markets, who can afford the lawyers necessary to interpret them. But simpler rules make our markets more accessible to small and medium-size firms, which, as we know, are the engines of economic growth and job creation.
A month ago, my Chief of Staff, Mike Gill, outlined the current Project KISS program. Look for a series of “Kissable” rule improvements over the course of the year to come.
Market Intelligence: The great Wayne Gretzky once explained that the secret to his success was that he skated to where the puck was going, not to where it had been. In the CFTC’s work overseeing the world’s most dynamic markets, we must also anticipate the development and direction of markets and “skate” to where they are going.
That is why we have created a new market intelligence branch. Its function is to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends – such as the impact of new technologies and trading methodologies. We also created a Chief Market Intelligence Officer, who engages with industry participants, other regulators, and the new Market Intelligence branch. Together, they are a key part of the CFTC’s goal of being a 21st Century regulator.
LabCFTC: We also developed another initiative to keep pace with technological innovation: LabCFTC. It is the focal point of our effort to engage with innovators, facilitate market-enhancing technology and fair competition and manage the interface between technological innovation, regulatory modernization and existing rules and regulations.
In less than a year of operation, LabCFTC has met with over 150 fintech innovators, from startups to large institutions and from lower Manhattan, to Chicago to Silicon Valley. It has observed demonstrations of many new technologies with the potential to improve our markets and enable the Commission to carry out its mission more effectively and efficiently.
Going forward, LabCFTC seeks ways to collaborate with external organizations, including domestic and international regulators, focused on sharing information and best practices in fintech innovation. A recent example is the collaboration agreement that UK Financial Conduct Authority CEO Andrew Bailey and I signed last month in London to share information on fintech innovation.
Right-sizing the CFTC’s regulatory footprint
Back To Basics: We are committed to right-sizing the CFTC’s regulatory footprint following years of expansive Dodd-Frank rule writing. This means resumption of normalized operations and practices, including greater care and precision in rule drafting, more thorough econometric analysis, less contracted time frames for public comment and a reduced docket of new rules and regulations to be absorbed by market participants.
Internally, we are rebuilding agency morale and esprit d’corps. We remain optimistic of appropriate agency funding after three years of flat budgets. We also recently achieved a two-year collective bargaining agreement with our union. We have filled key positions with capable leaders, including the General Counsel, Director of Enforcement and heads of the Division of Market Oversight (DMO), Division of Swap Dealer & Intermediary Oversight (DSIO), and Division of Clearing and Risk (DCR). Today, we are an agency that takes seriously our mission of quality and effective public service.
Cooperation works both ways. We have enhanced our relationships with other federal agencies, including the SEC, Federal Reserve, and FDIC, and with state agencies. We have new, operational metrics: partnership, harmonization, information sharing, sound budgeting, good customer service, pro-active and forward-looking thinking, technological proficiency and problem-solving.
Enhancing US derivatives markets
Enforcement: A year ago, I stood at this podium and issued a warning to those who may seek to cheat or manipulate America’s derivatives markets. I said, “There will be no pause, no let up and no reduction in our duty to enforce the law and punish wrongdoing in our derivatives markets. The American people are counting on us.”
In the year that has passed, the CFTC Division of Enforcement has made good on my warning. As the Wall Street Journal recently reported, the Division of Enforcement has filed almost as many fraud and manipulation cases in the past five months as it has in any prior fiscal year.
In January alone, the CFTC worked with the Department of Justice and FBI in bringing criminal charges against six individuals and several large market participants involved in commodities fraud and spoofing schemes. That action was the largest futures market criminal enforcement action in American history.
I am committed to punishing bad actors in the marketplace. That commitment is not only that of a regulator, but as a former marketplace operator, who knows that market integrity is essential to fostering robust trading and responsible risk taking.
A visible example of that commitment has been in the area of virtual currencies. Over the past several months, the CFTC filed a series of civil enforcement actions against perpetrators of fraud, market manipulation and disruptive trading involving virtual currency. One case involved a possible Ponzi scheme that fraudulently solicited algorithmic trading in virtual currency, made false reports and misappropriated funds. Another concerned potential commodity fraud and misappropriation. A third charged the defendants with fraud in connection with purchases and trading of Bitcoin and Litecoin. You get the picture.
Customer Education: Market growth and surveillance are also assisted, even stimulated, through consumer education. The CFTC’s Office of Consumer Education and Outreach engages with a range of audiences such as retail investors, industry professionals, seniors, and vulnerable populations who may be targeted by unscrupulous individuals with the intent to defraud them of their savings. We plan to expand this engagement in the year to come.
Okay. Those are some of the things we have been doing. Let me now tell you what is ahead:
Dealer De Minimis: This year we will complete rules on de minimis levels for swap dealer registration. Staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight have now presented my fellow Commissioners and me with current swap dealing data and analysis and are now addressing follow up questions. I am hopeful that the data will enable the Commission to reach a consensus on an appropriate de minimis level. I know my fellow Commissioners share my determination to complete the rule this year.
Supplemental Leverage Ratio: We remain focused on working with other US financial sector regulators to address elements of the Supplemental Leverage Ratio that inhibit greater central clearing of derivatives, a key mandate of the Dodd-Frank Act. The October 2017 Department of Treasury report on capital markets1 thoughtfully addressed these concerns. Specifically, the current SLR definition of total exposure is not reflective of a clearing member’s true exposure to swaps. We will work hard with other financial and prudential regulators to form a consensus around appropriate adjustments to the SLR.
SEF Rules: I have written and spoken about the fragmentation of global swaps markets caused by the CFTC’s flawed implementation of the swaps execution mandate under Dodd-Frank.2 I have asked DMO staff to reconsider the current swaps trading rules to fully accord with Congressional intent, better align to inherent market dynamics, fully allow US swap intermediaries to fairly compete in world markets and begin to reverse the tide of global market fragmentation. I intend to put before the Commission a rule proposal for notice and comment in the next few months.
Position Limits: I am committed to moving forward with a final position limits rule. It is an enormously important undertaking that will impact America’s farmers, ranchers, and manufacturers and their ability to hedge legitimate production costs. There are hundreds of comment letters on the topic and there are opinions on all sides of the issue, including by American agriculture producers. Based on public comments, it is clear that the Commission has not yet gotten it right.
DMO staff have begun work on revisions to the proposal that are responsive to the public comments. I have told them to ensure that American farmers, ranchers and producers can continue to use long standing hedging practices in our markets. I look forward to sitting down with the Division in the near future to discuss their progress.
Any final position limits rulemaking should be done properly by a full Commission of five commissioners. It will ensure that any final position limits rule is indeed final and stands the test of time and changes in future administrations.
Regulation AT: Regulation AT was an initiative of my predecessor, Chairman Massad. My position was and continues to be that, while there were some good things in the proposal, there were other things that were unacceptable and perhaps unconstitutional, including that proprietary source code used in trading algorithms be accessible at any time to the CFTC and the Justice Department without a subpoena.
At heart, Reg AT is a registration scheme that would put hundreds if not thousands of automated traders under CFTC oversight, a role for which our agency has inadequate resources. While I share genuine concerns about the inevitability of some future market disruption exacerbated by automated trading algorithms, there is nothing in Reg AT’s proposed imposition of burdensome fees and registration requirements on scores of trading firms that will prevent such an event.
When I voted against the current proposal, I said that the relatively blunt act of registering automated traders does not begin to address the complex public policy considerations that arise from the digital revolution in modern markets. We should and must do better.
I am open to considering whether there are elements in Reg AT that could serve as the basis for a new and truly effective rule. I believe my fellow Commissioners have some good ideas. Our new Market Intelligence Branch and Office of Chief Economist will provide critical market analysis of the role of algorithmic trading. In February, the UK FCA and the Prudential Regulatory Authority published papers outlining their respective regulatory governance and compliance expectations in respect of algorithmic trading. There is a growing body of data and analysis for us to draw upon. Yet, the goal must be an effective rule, not just any rule.
Cross Border
I began earlier by describing the global nature of today’s markets. Regulators must work cooperatively across borders to promote growth and innovation while supporting the financial stability of global markets.
And true to our word, we at the CFTC have spent considerable time and resources to forge strong relations and seek cross border coordination with regulators all over the world. I personally have sought to meet with as many of my foreign regulatory counterparts as possible. I have been an active participant in international bodies like the FSB and IOSCO. At the same time, CFTC staff are leading international working groups and task forces to build consensus and common ground with foreign authorities on a wide range of topics including international data standards, cybersecurity, crypto-assets and fintech, information-sharing and derivatives reforms.
Illustrative of these efforts are two significant equivalence milestones we reached with the European Commission in the past six months: comparability and equivalence of margin for uncleared swaps and an equivalence and exemption framework for swaps trading platforms. These tangible successes represent the CFTC’s willingness to work in good faith with the EU to avoid disruption to the trans-Atlantic market and my belief that regulatory and supervisory deference must be the basis for CFTC-EU engagement.
I fully expect that the CFTC’s relationship with the European Union will grow stronger in time. I believe that our cooperation on key regulatory issues is vital to spurring economic growth in both of our jurisdictions. Especially in the face of uncertainty over the United Kingdom’s future relationship with the rest of the European Union, embracing deference and cooperation between Europe and the United States is the only sensible path forward. I call on my friends in Europe to join me in this effort.
Conclusion
So, this is our agenda going forward both domestically and internationally. I look forward to reporting on our progress to you again next year.
I want to close with a reference to a film I saw recently: The Darkest Hour. It is the story about Winston Churchill and the lead up to his great 1940 speech expressing defiance and determination in the face of defeat.
What a remarkable individual. His vision, determination, and courage made him equal to the moment, defiance in the face of threatening danger. He would neither flag nor fail. Never give in or give up.
I call on us to do the same.
Our country and, particularly, our capital markets, have always attracted the fearless, the intrepid, the dauntless. That is because the very purpose of our markets is to defy fear, to hedge exposure, mitigate loss and control risk.
Let us endeavor to fearlessly build our markets, just like Leo Melamed, who came to this country, explored every advantage, and gave back more than he took.
Let us do the same. I turn to each and every one of you here: be fearless, be creative, be smart, be bold – with confidence, build the markets of tomorrow.
Thank you.
1 See U.S. Department of Treasury, A Financial System That Creates Economic Opportunities, Capital Markets, Oct. 2017, https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
2 Commissioner J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, Jan. 29, 2015, http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf.
Last Updated: March 14, 2018