As Prepared for Delivery

Introduction

Good afternoon.  I am delighted to join you today back in Naples for the first time since 2020.

The last several years tested resilience across the derivatives markets, which required working together to meet the most extreme, but plausible issues, events, inquiries, and environmental, geopolitical, and fiscal conditions.  The urgent need for action could not be met with hyperbolic responses.  Creating ad hoc boundaries and structures to earn an immediate victory lap rarely instills or supports market integrity.  Of course, neither does abdicating action until optimal conditions prevail.  As I think about my tenure and the direction of the agency, I have tried to follow the racing line: the most optimal path, making use of the entire breadth of our track.

I understand the critical role the CFTC plays in the global derivatives markets and the U.S. economy.  And when it comes to regulatory oversight and enforcement, I understand how the CFTC’s actions—and, at times, our decision not to act—reverberate throughout financial markets around the world.

I would like to spend my time focusing on the current rulemaking agenda, providing additional insight into accomplishments towards the end of 2023, and sharing some views on the current climate for crypto.  I will be happy to take questions after.

Gran Turismo

But first, a little pop culture.  2023 saw the release of Gran Turismo,[1] a Wikipedia-described “biographical sports drama film”[2] based on the true story of a teenage racing simulation video game player named Jann Mardenborough.  As part of a marketing strategy by Nissan’s motorsport division, Jann competed online with fellow players of the racing simulator Gran Turismo for a spot at the newly established GT Academy, where he would train and compete in real cars to ultimately become a professional race car driver.

I am not a gamer, and honestly, Clint Eastwood in Gran Torino[3] is more my speed.  But, as one blogger pointed out,[4] this tale of gamer turned legit international racing license carrier delivers some quotes and concepts that transpose rather nicely into the current narrative of novices and incumbents in the derivatives markets and the discourse on legitimacy.

And the license Jann was after to gain entry to world of the elites? It was granted by the FIA—but not the one you are thinking about.  In motor sports, the Fédération Internationale de l'Automobile (FIA)[5] sets consistent governance and safety standards, and has done so since 1904.  If you’ve ever typed in “fia.com” to reach the Futures Industry Association, you may have landed on their page.  And with that, let’s get back on track.

Reigniting the Dream to Drive

Last year, I presented a 2023 goal for the Commission to consider and vote on roughly 30 matters in addition to any rules or orders proposed in the prior year.[6]  I bucketed them into five themes for tracking purposes: 1) enhancing risk management and resilience; (2) strengthening customer protections; (3) promoting efficiency and innovation; (4) improving reporting and data policy; and (5) addressing duplicative regulatory requirements, and amplifying international comity.

Notwithstanding a few, always expected slips onto the rumble strip, we largely stayed on course, proposing and finalizing changes intended to strengthen governance, improve risk management and resilience, and ensure that all market participants get the information they need and protections they are entitled to, regardless of sophistication.  Along those lines, the CFTC proposed nine rulemakings, approved a final rule on DCO (derivatives clearing organization) governance, proposed one advanced notice of rulemaking, and published four matters for public comment.  Where appropriate, the proposals sought comment on whether to incorporate existing guidance and subjects addressed in staff letters.  Commission staff issued three advisories and over a dozen letters, many of which are time-limited to bridge gaps created by current and related rulemaking processes.  The Commission also issued two proposed and two final rules aimed at improving data and reporting requirements which not only support standardization and international harmonization efforts, but ensure that the CFTC can efficiently integrate, consume, and protect the information fundamental to everything we do. The Commission has continued to vote on matters via seriatim throughout these first few weeks of 2024, so please be on the look out for additional matters on our website.

No Time to Dance

One topic that perpetually keeps us in motion is cyber risk.  Last year’s Winter ABA meeting coincided with the cyber-related incident on ION Cleared Derivatives, a third-party service provider of cleared derivatives order management, execution, trading, and trade processing.[7]  The severity of the impact on each FCM’s (future commission merchant’s) operations, as well as each FCM’s ability to work-around impacted applications, varied based on the ION application used.[8]  Among other things, the incident impacted the timely and accurate submission of positions data to the CFTC, and therefore delayed the timely release of the Commitments of Traders (CoT) report.

At the time, our Market Participants Division (MPD) was already on course to develop proposals to address cybersecurity and related risk.  Recognizing the relevant risk, I asked them to further identify potential weaknesses with respect to third-party service providers and vendor relationships and identify appropriate solutions for Commission consideration.

Last month, the Commission voted unanimously to issue (1) a notice of proposed rulemaking to require FCMs, swap dealers (SDs), and major swap participants (MSPs) (collectively, “covered entities”) to establish an operational resilience framework and (2) to adopt non-binding Commission guidance relating to the management of risks stemming from third-party relationships.[9]  The proposed rule would require the covered entities to establish, document, implement, and maintain an Operational Resilience Framework (ORF).  This proposal would require a process to identify, monitor, manage, and assess risks relating to IT security, third-party relationships, and emergencies or other significant disruptions to their operations as a CFTC registrant.[10]  The ORF would need to include three components: an IT security program, a third-party relationship program, and a business continuity and disaster recovery (BCDR) plan.

As I said at the Commission’s December open meeting,[11] this proposed rule and guidance represent many months of in-depth research and reflects consideration of standards and guidance issued by the prudential regulators, the SEC (Securities and Exchange Commission), NFA (National Futures Association), IOSCO (International Organization of Securities Commissions), the FSB (Financial Stability Board), and other subject matter experts within and outside the CFTC.  It also recognizes that covered entities encompass a variety of business models, including those in which operational resilience programs may be managed at an enterprise level.  Consistent with our principles-based approach, an entity’s ORF must be appropriate and proportionate to the nature, size, scope, complexity, and risk profile of the firm’s business as an FCM or SD, following generally accepted standards and best practices.

Similarly, the proposed guidance identifying factors, actions, and strategies for covered entities to consider in preparing and implementing their third-party relationship programs is intended to be broadly relevant to such entities, without necessarily being universally applicable.

The ION incident reminded us that “there’s no time to dance”[12] when it comes to cyber risk and resilience.  We are now firmly in the driver’s seat and will get this proposal and guidance across the finish line in 2024.

Finding the Right Instructor and Throttling Out

In the film, the success of the Nissan’s GT Academy hinged on finding the right instructor.  Having some miles under my belt and laps around the track combined with some incredible talent on my team and in the pit, I see no reason to stand idle on issues that are clearly on the road ahead.  One is the use of AI in CFTC-regulated markets.

Yesterday, the CFTC’s new AI Task Force issued a request for comment or “RFC” on the use of AI in CFTC-regulated markets.[13]  As I previewed in November,[14] this RFC complements the directives set forth by the Biden Administration, and embodies good government process.  It prioritizes promoting responsible innovation and ensuring that we understand AI applications and the associated risks and impacts in our jurisdictional markets and the larger financial system.  This allows us to better align supervisory oversight and evaluate the need for future regulation, guidance, or other Commission action.

The AI RFC is part of a greater vision I shared in November that will keep the CFTC on its current trajectory advancing analytical capabilities through building talent, leveraging the cloud, and developing a forward-looking AI culture.  We have a process in place for exploring AI use cases aimed at helping us better monitor, regulate, surveil, identify pockets of stress, and ultimately enforce compliance.  This RFC will further support us as we strategically identify the highest priorities and return-on-investment projects to pursue.  Further, and notably, the retooled CFTC’s Office of Customer Education and Outreach today issued a Customer Advisory warning the public about AI-driven fraud and scams.[15]

I am excited by what we are doing at the CFTC and what is on the horizon for the derivatives markets and the entire industry.  AI, like a position at the GT Academy, presents significant benefits and opportunities.  But when you are the driver of a real vehicle, outside the safety of a sim world, you can’t hit the reset button when you spin out or crash.  As the regulator, we are here to help ensure your safety and that of the markets, and other market participants.

The AI RFC will be open for comment for 90 days.  During that time, the Commission will continue on its current circuit and begin finalizing the various proposals and comparability determinations introduced in 2023.  I anticipate staying on that rulemaking track for the remainder of the year, making pit stops to consider and address applications and requests within our regulatory and supervisory authorities and matters that fall within our typical business-as-usual operations.  I also anticipate that the Commission will consider a handful of additional proposals aimed at keeping pace with new models in our regulatory space that are gaining traction as they incorporate emerging technologies to create efficiencies and attract a larger, broader audience.

Last summer, I directed staff to draft and issue the Request for Comment on the Impact of Affiliations on Certain CFTC-Regulated Entities.[16]  Coincidently, I referred to it in remarks as an invitation for our stakeholders to put themselves in the driver’s seat and consider how to best address the new structures being proposed and already launched, without undermining the integrity of the sport (i.e., our markets).[17]  Without question, addressing and eliminating conflicts of interest is core to the Commodity Exchange Act.  However, these new structures, driven in part by technology advancements, demand fresh scrutiny, as patterns are developing that may steer the industry into the future.  There is no better time than now to engage, debate, and act.

The comment period closed in the fall.  I anticipate that by the summer the Commission will consider a proposal addressing potential risks, conflicts, and governance issues that may be raised by new market structures and affiliate relationships.

Ultimately, I envision that while any new policy will be informed in part by the comments received in the RFC and the Commission’s real-time observations, the goal is to continue building off of the models and structures that have been time-tested and developed over decades to promote market resiliency and protect customers.  However, as our mission requires, we must move forward with market evolution without undermining strength and stability.

In GT, Nissan’s motorsport division knew that if a sim driver was put in one of their cars, and someone got hurt, it would be their collective responsibility.  So, here, like in the movie, we are working with all stakeholders and engaging within a timeframe dictated by the complexity of the issues, and not by the pressure of the clock.  We are being cautious.  As I have said, our duty is to firmly ascertain the validity of innovative and novel market structures before they are permitted to operate as a means of financial risk mitigation.  If we feel that something is unsafe, we are going to have to switch gears.  As the GT Academy trainer put it, “If you want to put yourself out there, you have to prove that you can do it.”[18]

COP28 Debut

COP28 set the stage for the Commission to further demonstrate its global position on the international stage.  Attending COP28 in person, I introduced the Commission’s proposed guidance regarding the listing of voluntary carbon credit (VCC) derivative contracts.[19]  Published for public comment in the federal register in December, and identified as one of the most important developments for the carbon industry,[20] this is the first proposed guidance on standards applicable to exchanges listing products aimed at providing tools to manage risk, promote price discovery, and help channel capital in support of decarbonization efforts.[21]

In the last several years, the CFTC engaged with stakeholders ranging from farmers and foresters to crediting programs, registered exchanges, and clearinghouses.  With my CFTC team behind me, and the support of fellow regulators at Treasury and within the Administration,[22] I was honored to personally roll-out the Agency’s guidance.

I believe that this initial step by a market regulator parallels important work underway by IOSCO through its Sustainable Finance Task Force’s Carbon Market Workstream, which I co-Chair, and that launched a consultation on standards for VCCs at COP28 focused on how regulators can promote sound market structure and enhance financial integrity in the voluntary carbon markets.[23]  As I’ve stated, the CFTC is doing its part to elevate efforts underway.[24]  The comment period is open until February 16^th.

I have been very clear that the CFTC’s actions in the VCC markets are not intended to signal that we have a role in creating or mandating compliance with any kind of climate policy.[25]  I have also been very clear that our unique mission focused on risk mitigation and price discovery puts us on the front lines of the now global nexus between financial markets and decarbonization efforts.  Leveraging the CFTC’s personnel and expertise demonstrates our commitment to taking thoughtful and deliberate next steps toward supporting a financial system that provides effective tools in achieving emission reductions.

Champagne is for the Podium  

Turning back to CFTC victories, nothing put us on the podium more in 2023 than our enforcement efforts.  I ran through the stats, numbers, and highlights in October at FIA Expo as they rolled in following the close of FY 2023.[26]  More than anything, CFTC’s enforcement program ensures that markets function well and that bad actors are dealt with in a manner that motivates compliance and incites deterrence.  As the range of actions brought by the CFTC demonstrate, not every violation is premised on proof of customer harm.  Our regulatory and enforcement activities under the Commodity Exchange Act are designed to prevent and deter disruptions to the markets and harm to the public by, among other things, ensuring that there are adequate barriers to entry (i.e., more than an app tap away) and that market integrity is maintained through transparency, fair pricing, and competition.

There are always those who think they can buy their way in without meeting the rigors of registration and compliance.  But, that’s a tough façade to maintain when we have cops on the beat, surveillance on the ground and in the cloud, whistleblowers on the inside, SROs on our side, and partners around the globe.  And it is isn’t easy to operate in the derivatives markets.  If you don’t follow the rules, if you make conditions dangerous for other participants or create risk and potentially contagion, if you harm customers directly or injure reputations, you will be flagged and taken out.  Nowhere have we been more active than in the digital asset or simply the “crypto” space.  In FY 2023, we secured our status as the premier enforcement agency in the space.[27]  The CFTC brought 47 actions involving conduct related to digital asset commodities, representing more than 49% of all CFTC actions filed during that period.

The CFTC does all this without direct jurisdiction over the digital asset spot markets.  As everyone in this room knows, we can only act on digital asset fraud or manipulation when we uncover or discover anomalies through regulated market surveillance and oversight, or through tips and complaints we can pursue. We are doing all this—and making the headlines—with a restrictor plate installed.  Imagine what we could do if we were given the tools to open up the throttle?

Licensing and Legitimacy

The Security and Exchange Commission’s long-anticipated approval of applications to list and trade shares of spot bitcoin exchange-traded products (ETPs) was viewed by many as a natural next step in the development of markets for digital assets.  Regardless of how loud opposition may be, institutions, products, and processes that prove valuable to enough producers, consumers, investors, and the general public— however such value is determined— will inevitably find a way to integrate with established regulatory systems.

While the ETPs are achieving legal certainty and therefore a means to market themselves to the masses, there remains nothing firmly in place to address the opaque and inconsistent practices in the cash markets for digital assets around issues such as trade settlement, conflicts of interest, data reporting, cybersecurity, customer protections, transparency, and general market integrity.  Instead, the ETPs have taken a speculative and volatile asset, wrapped it in a thin layer of indirect regulation, and packaged it as a shiny new product.

Many of the barriers to successfully and appropriately regulating this emerging market have been built on fears of legitimatization.  I believe the legitimacy argument takes our eyes off the road.  As proven by the SEC’s January 10^th decision, legislation is not a precursor to legitimacy.  Going back to GT, Jann earned his FIA racing license by demonstrating that he had the skills to compete within the established parameters.  While technically that license gained him access, it did not make him a legitimate driver.  He was warned that he would have to prove that he belonged in the world of racing because he had not entered through the normal, traditional channels.  No one would welcome him, not the drivers, not his pit crew, and the mechanics would hate him, because in spite of the license, he was inherently unsafe.[28]  The license did not change the nature of the risk.

Not a single federal regulator has been granted authority by Congress over the cash markets for digital assets.  And even for regulated products like bitcoin futures, their legitimacy alone is not based on a self-certification.  Rather, the market participants determine legitimacy by creating demand for a product.  The CME, CBOE Futures Exchange, and the Cantor Exchange would not have self-certified derivatives products with bitcoin as the underlying asset if there had not been significant interest in the products.

As I have said with regard to the derivatives markets we oversee, the exchanges have a long history of developing and enforcing standards for derivatives products.  They generally have unique knowledge of the underlying marketplace and have longstanding relationships with market participants to understand precisely how to meet their risk management needs and speculative interests.  Our role as the regulator is to enforce existing standards under our governing statute, the Commodity Exchange Act, and regulations.  In short, we do not have authority to determine legitimacy in the eyes of market participants; however, we are here to ensure that legitimacy means something more than common sentiment.

The lack of legislation has not hindered the enthusiasm for digital assets.  And for those of you who have been fighting for digital assets to go away in the absence of legislation, take a moment and see where we now find ourselves.

I fear that the regulatory approval of bitcoin ETPs introduces risk that, in spite of yellow flags, market participants, retail and institutional alike, may mistake the technical approval of a product—with actual regulatory oversight of the cash commodity digital assets.  The concerns I have publicly voiced for the better part of six years regarding the digital asset commodity spot market have only become magnified.  The need for federal legislation over cash market digital assets has never been more critical, and I will continue my call for action.

Conclusion

I began these remarks with some thoughts on how regulators must avoid meeting urgency with hyperbole to get an instant win.  While ad hoc decisions made under duress can miss the mark when it comes to providing clarity and preserving market integrity, so too can waiting until pristine conditions prevail.

As we move forward in 2024, I am proud of the CFTC’s undeniable record of using regulation, innovation, and collaboration to ensure our markets function well, and continue to serve risk management and transparency needs. 

More than ever, we need thorough and thoughtful regulation to ensure confidence and accountability in the derivatives markets.  

Thank you.