[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE UPCOMING AGENDA FOR THE COMMODITY FUTURES TRADING
COMMISSION
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HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
July 25, 2018
__________
Serial No. 115-15
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
30-977 PDF WASHINGTON : 2018
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COMMITTEE ON AGRICULTURE
K. MICHAEL CONAWAY, Texas, Chairman
GLENN THOMPSON, Pennsylvania COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
BOB GOODLATTE, Virginia, DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma JIM COSTA, California
STEVE KING, Iowa TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama MARCIA L. FUDGE, Ohio
BOB GIBBS, Ohio JAMES P. McGOVERN, Massachusetts
AUSTIN SCOTT, Georgia FILEMON VELA, Texas, Vice Ranking
ERIC A. ``RICK'' CRAWFORD, Arkansas Minority Member
SCOTT DesJARLAIS, Tennessee MICHELLE LUJAN GRISHAM, New Mexico
VICKY HARTZLER, Missouri ANN M. KUSTER, New Hampshire
JEFF DENHAM, California RICHARD M. NOLAN, Minnesota
DOUG LaMALFA, California CHERI BUSTOS, Illinois
RODNEY DAVIS, Illinois SEAN PATRICK MALONEY, New York
TED S. YOHO, Florida STACEY E. PLASKETT, Virgin Islands
RICK W. ALLEN, Georgia ALMA S. ADAMS, North Carolina
MIKE BOST, Illinois DWIGHT EVANS, Pennsylvania
DAVID ROUZER, North Carolina AL LAWSON, Jr., Florida
RALPH LEE ABRAHAM, Louisiana TOM O'HALLERAN, Arizona
TRENT KELLY, Mississippi JIMMY PANETTA, California
JAMES COMER, Kentucky DARREN SOTO, Florida
ROGER W. MARSHALL, Kansas LISA BLUNT ROCHESTER, Delaware
DON BACON, Nebraska
JOHN J. FASO, New York
NEAL P. DUNN, Florida
JODEY C. ARRINGTON, Texas
______
Matthew S. Schertz, Staff Director
Anne Simmons, Minority Staff Director
(ii)
C O N T E N T S
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Page
Conaway, Hon. K. Michael, a Representative in Congress from
Texas, opening statement....................................... 1
Prepared statement........................................... 3
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 4
Witness
Giancarlo, Hon. J. Christopher, Chairman, Commodity Futures
Trading Commission, Washington, D.C............................ 4
Prepared statement........................................... 6
EXAMINING THE UPCOMING AGENDA FOR THE COMMODITY FUTURES TRADING
COMMISSION
----------
WEDNESDAY, JULY 25, 2018
House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 10:02 a.m., in Room
1300 of the Longworth House Office Building, Hon. K. Michael
Conaway [Chairman of the Committee] presiding.
Members present: Representatives Conaway, Lucas, Gibbs,
Austin Scott of Georgia, Crawford, Hartzler, LaMalfa, Davis,
Yoho, Allen, Bost, Rouzer, Abraham, Kelly, Comer, Marshall,
Bacon, Faso, Dunn, Arrington, Peterson, David Scott of Georgia,
Vela, Kuster, Nolan, Bustos, Plaskett, Evans, Lawson,
O'Halleran, and Soto.
Staff present: Caleb Crosswhite, Darryl Blakey, Mindi
Brookhart, Paul Balzano, Rachel Millard, Matthew MacKenzie,
Mike Stranz, Patrick Delaney, Troy Phillips, Nicole Scott, and
Carly Reedholm.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE
IN CONGRESS FROM TEXAS
The Chairman. Good morning. This hearing of the Committee
on Agriculture entitled, Examining the Upcoming Agenda for the
Commodity Futures Trading Commission, will come to order. Trent
Kelly, will you open us in a prayer?
Mr. Kelly. If you will bow your heads.
Precious Heavenly Father, we just thank You for this
wonderful day. Dear Lord, we just ask that You bless this great
nation. We ask that You bless our farmers and all those who
feed and provide for this great nation. Dear Lord, we just ask
that all we do honor You and that we honor the principles of
giving and service, and service to You and service to this
nation. In Jesus' name I pray, Amen.
The Chairman. Thank you. Chris, welcome.
Good morning, and I want to welcome all of you today to our
hearing examining the upcoming agenda at the Commodity Futures
Trading Commission.
I will start by welcoming back Chris Giancarlo. Chris, it
is great to have you back. We will have to get an explanation
of who hit you in the face, but we will get to that shortly. I
hope the other guy looks a whole lot worse, right?
The Committee last met with you in October and at that
time, you were working on a number of important initiatives at
the Commission, notably, the LabCFTC and Project KISS. You also
outlined a plan to begin refining the title VII swaps rules,
focusing on the rules for trading and data reporting.
Since then, you have introduced a number of additional
topics to the regulatory agenda through your recent Swaps 2.0
white paper. I appreciate the clear framing of your concerns
and sensible suggestions you have made to solve real problems,
while still supporting the overarching goals of title VII. I
look forward to an update on these efforts to improve the swaps
regulatory regime.
I am also looking forward to an update on an area of
significant concern to this Committee, and that is the
coordination and harmonization of our international regulatory
peers.
Six years ago, when U.S. regulators were seeking to extend
the reach of our rules into foreign jurisdictions, we invited
Patrick Pearson to testify on behalf of the European Commission
before my Subcommittee. In his testimony, he could not have
been clearer: when two jurisdictions have comparable rules,
regulators should be able to defer to one another.
And yet today, it appears Europe is reversing course and
proposing policies that would require a foreign jurisdiction to
comply with EU rules in order to service the EU market. I
supported Mr. Pearson's position then, when I thought the CFTC
was overreaching, and I still support that same position today,
as the European Commission contemplates similar overreach. The
European Commission needs to heed its own advice and preserve
the hard-fought equivalency agreement with the United States.
Before I hand it off to the Ranking Member, I would like to
talk just a moment about reauthorization of the CFTC and its
budget.
When I became Chairman, I made a pledge to clean up our
statutes and reauthorize all of the lapsed programs in our
Committee's jurisdiction. At the time, the CFTC had been
unauthorized for well over a year, and I was concerned that if
we didn't get it done then, we never would.
To that end, the House passed legislation to reauthorize
the Commission in 2013, again in 2015, and again in 2017, but
our Senate colleagues have consistently failed to act. The
Commission remains unauthorized and its budget remains flat for
the third year in a row.
Even though Congress has not been able to act, the
Commission and its responsibilities have not stood still.
Sitting before us today is a Chairman who has worked harder
than anyone I have met in government to fulfil Congress'
expectations as a steward of taxpayer dollars. He has put
together two budgets that are clear and sustainable, and he has
established a long-term vision for the agency and its mission.
Mr. Chairman, this Committee expects you to continue to
refine your rules, to oversee critical pieces of our financial
markets, and to tackle all these new challenges that are
coming. But to do that, I acknowledge that you are going to
need resources to hire staff and fund technology improvements.
While I have not given up on reauthorizing the agency, we
cannot continue to hold the agency hostage another year based
on Senate inaction.
I hope that we can reset this debate and find a new way
forward on both reauthorization and the Commission's budget in
the upcoming months.
With that, I want to thank you again, Chris, for being
here.
[The prepared statement of Mr. Conaway follows:]
Prepared Statement of Hon. K. Michael Conaway, a Representative in
Congress from Texas
Good morning. I want to welcome you all to today's hearing
examining the upcoming agenda at the Commodity Futures Trading
Commission.
I'd like to start by welcoming back Chairman Giancarlo. Chris, it's
great to have you back here.
The Committee last met with you in October and at that time, you
were working on a number of important initiatives at the Commission,
notably, LabCFTC and Project KISS. You also outlined a plan to begin
refining the title VII swaps rules, focusing on the rules for trading
and data reporting.
Since then, you've introduced a number of additional topics to the
regulatory agenda through your recent Swaps 2.0 white paper. I
appreciate the clear framing of your concerns and sensible suggestions
you've made to solve real problems, while still supporting the
overarching goals of title VII. I look forward to an update on these
efforts to improve the swaps regulatory regime.
I am also looking forward to an update on an area of significant
concern to this Committee: coordination and harmonization with our
international regulatory peers.
Six years ago, when U.S. regulators were seeking to extend the
reach of our rules into foreign jurisdictions, we invited Patrick
Pearson to testify on behalf of the European Commission before my
Subcommittee. In his testimony, he could not have been clearer: when
two jurisdictions have comparable rules, regulators should be able to
defer to one another.
Yet, today, it appears Europe is reversing course and proposing
policies that would require a foreign jurisdiction to comply with EU
rules in order to service the EU market. I supported Mr. Pearson's
position then--when I thought the CFTC was overreaching--and I still
support that same position today, as the European Commission
contemplates similar overreach. The European Commission needs to heed
its own advice and preserve the hard-fought equivalency agreement with
the United States.
Before I hand it off to the Ranking Member, I want to talk for just
a moment about reauthorization and the CFTC's budget.
When I became Chairman, I made a pledge to clean up our statutes
and reauthorize all of the lapsed programs in the Committee's
jurisdiction. At the time, the CFTC had been unauthorized for well over
a year, and I was concerned that if we didn't get it done then, we
never would.
To that end, the House passed legislation to reauthorize the
Commission in
2013 . . . and again in 2015 . . . and again in January 2017, but the
Senate has consistently failed to act. The Commission remains
unauthorized and its budget remains flat for the third year in a row.
Even though Congress has not been able to act, the Commission and
its responsibilities have not stood still. Sitting before us today is a
Chairman who has worked harder than anyone I've met in government to
fulfil Congress' expectations as a steward of taxpayer dollars. He's
put together two budgets that are clear and sustainable, and he's
established a long-term vision for the agency and its mission.
Mr. Chairman, this Committee expects you to continue to refine your
rules, to oversee critical pieces of our financial markets, and to
tackle all the new challenges that are coming. But, to do that, I
acknowledge that you are going to need resources to hire staff and fund
technology improvements. So, while I have not given up on reauthorizing
the CFTC, we cannot hold the agency hostage to another year of the
Senate's inaction.
I hope that we can reset this debate and find a new way forward on
both reauthorization and the Commission's budget in the coming months.
With that, thank you for joining us today. I look forward to your
testimony.
The Chairman. I now turn to my colleague, Mr. Peterson, for
his opening remarks.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE
IN CONGRESS FROM MINNESOTA
Mr. Peterson. Thank you, Mr. Chairman. Good morning, and
thank you, Chairman Giancarlo, for joining us today.
As the country continues to recover from the financial
crisis that began to take hold of our economy almost 10 years
ago, we all know the need for sound oversight and regulation of
our derivative markets. It is in our collective interest to see
that these markets function as intended, and that end-users and
consumers are protected against bad actors that we all know are
out there.
I am looking forward to your update on the work of the
Commission and your year in charge, specifically with regard to
the final stages of implementation of the Dodd-Frank Act and
your efforts to turn the Commission's focus to the future.
In that spirit, I hope that you will address some evolving
issues of concern, including the transition away from the LIBOR
(London Interbank Offered Rate) benchmark, and update us on any
progress that the Commission has made on the regulation of
automated trading.
Finally, as you all know, the Committee took a look last
week at cryptocurrencies. Clearly, there are more questions
than answers when it comes to this new technology, and I am
curious to hear your thoughts on where our oversight of CFTC
may need to go regarding Bitcoin and other digital assets.
Again, thank you for joining us, and I look forward to your
testimony.
The Chairman. I thank my colleague. I remind our other
Members to submit their opening statements for the record so
that the witness may begin his testimony to ensure that there
is ample time for questions.
With that, I would like to welcome to our table once again
the Honorable Chris Giancarlo, Chairman of the Commodity
Futures Trading Commission, Washington, D.C. Mr. Chairman, you
are recognized for your comments. Thank you.
STATEMENT OF HON. J. CHRISTOPHER GIANCARLO,
CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON,
D.C.
Mr. Giancarlo. Thank you, Chairman Conaway, Ranking Member
Peterson, and distinguished Members of the Committee.
Mr. Chairman, when I was last before you, you pointed out
that I made a tactical error, and I didn't introduce my wife at
that time. I make errors, I make my share of them, but I try
not to make the same one twice, so you will allow me to
introduce my daughter who is with me today, Emma Giancarlo. It
is a pleasure to have her with me today. Thank you.
The last time I testified, I stated my priorities for the
CFTC: to foster open, transparent, competitive, and financially
sound markets free from fraud and manipulation, and in support
of broad-based economic growth while respecting the American
taxpayer with careful management of agency resources. Thank you
for allowing me this opportunity this morning to report on
progress on those goals.
The CFTC is on a strong and steady course. Our refocus on
the core mission of supervising American agriculture commodity
futures markets is once again front and center for this agency.
Our enforcement activities have never been more determined, yet
more cooperative, with other Federal, state, and self-
regulatory enforcement partners. Our reenergized economic
research and new market intelligence provide fresh insight into
the changing nature of modern markets. Our consumer education
efforts are increasingly effective through contemporary means
of communication and outreach. Our work to streamline and
simplify regulations is underway through our Project KISS
initiative, and our engagement with financial innovation and
market enhancing technology is highly active through LabCFTC.
Meanwhile, we are a team player with other U.S. financial
and Prudential Regulators, working especially cooperatively
with our fellow market regulators at the SEC. We readily
coordinate with international regulators and standards setting
bodies, and we are leaders in many international regulatory
forums, including in the area of swaps data harmonization.
Looking internally, our union relations are sound and
productive. Employee morale is increasingly positive, and with
two fine new Commissioners, and hopefully two more on the way,
the CFTC is functioning well and in a collegial fashion. I
believe the American people can look upon the CFTC with
satisfaction in terms of taxpayer value, effective oversight of
U.S. markets, and thoughtful development of public policy for
the digital financial markets of this early 21st century.
As Members of this Committee know, futures and swaps
markets serve at least two critical roles in American
agriculture, and the broader U.S. economy.
First, they allow America's farmers, energy producers, and
manufacturers to quantify and transfer the risks of production
to parties willing and able to take that risk, thereby
stabilizing costs. This benefits all parties, including
American consumers who may never get involved in derivatives in
the first place.
And second, these markets resolve market imbalances
efficiently by providing reliable and fair benchmarks for
commodity prices and financial indices.
American markets for commodity futures and other
derivatives are vital national interests. CFTC regulated
futures exchanges and clearinghouses are amongst the world's
most robust and resilient. Even in the face of extreme
volatility, as we saw this past February, CFTC regulated
clearinghouses have been able to successfully take on and
manage risk, enabling valuable risk transfer to support and
stabilize our broader American financial markets.
That is why to avoid market fragmentation, regulatory
confusion, and market protectionism, American markets must
continue to be regulated under U.S. law by Federal regulators
overseen by this Committee of Congress.
In closing, with the proper balance of sound policy,
American regulatory oversight, and supervisory deference by our
overseas regulatory counterparts, U.S. commodity derivative
markets will continue to evolve in responsible ways. And thanks
to America's farmers, energy producers, manufacturers, and
lenders, they will help feed and power the world and drive
global economic growth, not just today, but for generations to
come.
Thank you for this opportunity to testify. I look forward
to your questions this morning.
[The prepared statement of Mr. Giancarlo follows:]
Prepared Statement of Hon. J. Christopher Giancarlo, Chairman,
Commodity Futures Trading Commission, Washington, D.C.
Introduction
Thank you, Chairman Conaway, Ranking Member Peterson, and Members
of the Committee. I appreciate the opportunity to appear before you
today to discuss my priorities and the work of the Agency.
It has been just under a year since my confirmation as Chair of the
Commodity Futures Trading Commission (CFTC or Commission) last August.
It is an appropriate time to update this Committee on the progress of
the CFTC.
I am pleased to report that the agency is on sound footing in
meeting its statutory mission. Some examples of what we are currently
doing are highlighted below:
Our refocus on the CFTC's core mission of supervising
American agriculture commodity futures markets is once again
front and center;
Our consumer education efforts are increasingly effective
through contemporary means of communication;
Our economic research and market intelligence provide new
insight into the changing nature of global markets;
Our efforts to streamline and simplify rules and regulation
are underway through our Project KISS initiative;
The strength and determination of our enforcement activities
have never been more robust, and more cooperative with other
Federal, state and SRO enforcement partners;
The agency actively coordinates with international
regulators and plays a leadership role in a number of
international regulatory forums.
Union relations are sound and productive, and employee
morale is increasingly positive; and
The agency remains a careful steward of the resources it
receives from the American taxpayer.
With two fine new Commissioners and, hopefully, two more on the
way, the CFTC is functioning well and in a collegial fashion. I believe
the CFTC is an agency upon which the American people can look with
satisfaction in terms of taxpayer value, effective oversight of U.S.
markets and mature development of public policy amidst the rapid pace
of change of Twenty-first Century financial markets.
Let me review these points in greater detail.
Physical and Financial Markets
The American agricultural market is foundational to the economy.
Agricultural, food, and related industries contributed $992 billion to
the U.S. economy in 2015, 5\1/2\ percent (5.5%) of the gross domestic
product.\1\ And, in 2016, agriculture provided 21.4 million full- and-
part time jobs, or eleven (11%) percent of total U.S. employment.\2\
The figures in international trade are also sizable. In Fiscal Year
2018, the Department of Agriculture projects that agricultural exports
will exceed $142 billion, with imports at $121.5 billion, for a net
balance of trade over $20 billion.\3\ That balance of trade is good for
the nation and for American farmers. The United States is the
breadbasket to the nation and the world. And it is our commodity
futures markets that help create our abundance by providing risk
mitigation and everyday pricing to farmers, ranchers, and producers.
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\1\ Economic Research Services, What is Agriculture's Share of the
Overall U.S. Economy? U.S. Department of Agriculture (last updated Oct.
14, 2016): https://www.ers.usda.gov/data-products/chart-gallery/
gallery/chartdetail/?chartId=58270.
\2\ Economic Research Services, Ag and Food Sales and the Economy,
U.S. Department of Agriculture (last updated May 02, 2018): https://
www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-
essentials/ag-and-food-sectors-and-the-economy/.
\3\ Economic Research Services, Outlook for U.S. Agricultural
Trade, U.S. Department of Agriculture (last updated June 18, 2018):
https://www.ers.usda.gov/topics/international-markets-us-trade/us-
agricultural-trade/outlook-for-us-agricultural-trade/.
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American derivatives markets are the world's largest, most
developed, and most influential. Many of the world's most important
agricultural, mineral, and energy commodities are priced in U.S.
dollars in U.S. derivatives markets. Dollar pricing of the world's
commodities provides a tremendous advantage to American producers in
global commerce, an advantage well recognized by competing economies
abroad.
American derivatives markets are also the world's best regulated.
The United States is the only major country in the Organisation for
Economic Co-operation and Development to have a regulatory agency
specifically dedicated to derivatives market regulation: the CFTC. The
CFTC has overseen the U.S. exchange-traded derivatives markets for over
40 years. The agency is recognized for its principles-based regulatory
framework and econometrically-driven analysis. The CFTC is recognized
around the world for its depth of expertise and breadth of capability.
This combination of regulatory expertise and competency is one of
the reasons why U.S. derivatives markets continue to serve the needs of
participants around the globe to hedge price and supply risk safely and
efficiently. It is why well-regulated U.S. derivatives markets continue
to serve a vital national interest--U.S. dollar pricing of important
global commodities.
Foreign Competition
As you may know, in the first quarter of 2018, the Shanghai
International Energy Exchange launched a yuan-denominated crude oil
contract allowing non-Chinese market participants to trade directly for
the first time in the Chinese commodity markets. Shortly following this
new contract, China opened yuan-denominated iron ore and bunker fuel
oil contracts to international traders. There is also talk of China
allowing international market participants to trade Chinese futures
contracts in rubber, copper and even soybeans.
China is the world's largest consumer of oil and fuel and a major
global purchaser of iron ore for its world leading steel production.
The opening up of China's domestic futures markets to international
participation is part of a long-term, Chinese Government strategy to
expand China's influence over the pricing of key industrial
commodities.
The development of Chinese commodity futures markets as viable
regional price benchmarks for key industrial commodities has
competitive implications for the United States. We cannot be complacent
about the historical primacy of our derivatives markets. Our best
response for U.S. commodity market participants and, indeed, for global
markets, is to ensure that derivatives markets in the United States are
unrivaled in their openness, orderliness, liquidity.
In short, America's well-regulated derivatives markets are a
national advantage in global economic competition. However, we must not
take this advantage for granted. In order for U.S. derivatives markets
to remain the world's best, U.S. markets must remain the world's best
regulated. To be the best regulated, U.S. derivatives markets must have
an adequately funded regulator. The CFTC must have adequate resources
to continue to serve its mission to foster open, transparent,
competitive, and financially sound U.S. derivatives markets that remain
the envy of the world.
Kansas City Agriculture Conference
On April 5th and 6th, the CFTC hosted two important meetings in
Kansas City. On April 5th the CFTC Agricultural Advisory Committee, led
by Commissioner Rostin Behnam, discussed issues related to price
discovery and risk management in agricultural markets. Panelists were
able to address the importance of crop insurance as a critical risk
management tool for growers and the role that futures markets play to
crop insurance. We also heard from panelists regarding price discovery
and the recent implementation of block trading in agricultural futures
contracts.
CFTC, along with Kansas State University, also conducted a first-
of-its-kind conference called, ``Protecting America's Agricultural
Markets: An Agricultural Commodity Futures Conference.'' Panelists
discussed current macro-economic trends and issues affecting our
markets, like market speculation, high frequency trading, trade data
transparency, novel hedging practices and market manipulation.
Participants looked at problems in convergence between cash and futures
prices and volatile storage rates and heard about advances in
distributed ledger technology, algorithmic trading and other emerging
digital technologies, as well as current regulatory activities in
protecting participants from manipulation, fraud and other unlawful
activities.
Our common purpose was to hear from end-users who use our markets
to hedge risk and to consider and address issues of emerging market
structure and trading practices to ensure that these markets remain the
world's most robust, dynamic and liquid for decades to come. American
commodity futures markets are vital national interests that we must
protect and enhance.
The Conference also heard about ways in which emerging technology
is pulling farmers and ranchers into a virtual future, often beyond
comprehension, with a powerful, gravitational pull. They are entering
this virtual world with worries about trade, commerce, costs, and
competition. And, as regulators, we needed to listen, and to continue
to listen. The future is now, for them, and for us. Our task, as market
regulators, is to set and enforce rules that foster innovation while
promoting market integrity and confidence.
Oversight of Virtual Currencies
The hearing last week before this Committee examined the
opportunities and risks involved in the evolution of digital
currencies. Emerging financial technologies are taking us into a new
chapter of economic history. They are impacting trading, markets, and
the entire financial landscape with far ranging implications for
capital formation and risk transfer. They are transforming the world
around us, and it is no surprise that these technologies are having an
equally transformative impact on U.S. capital and derivatives markets.
Knowing the challenges ahead, my focus as Chairman has been guided
by six broad elements concerning virtual currency: (1) staff
competency; (2) consumer education; (3) U.S. interagency cooperation;
(4) exercise of authority; (5) strong enforcement; and, (6) heightened
review of virtual currency product self-certifications.
You heard last week from Daniel Gorfine, Chief Innovation Officer
and Director of LabCFTC about the work we are doing to learn more about
investments being made in technologies that may or may not impact our
regulatory jurisdiction. LabCFTC is the focal point of the CFTC's
efforts 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. I believe that this work is critical to the agency
being a 21st century regulator.
The work of LabCFTC has highlighted an important issue that U.S.
regulators face. We have certain limitations in the ability to test,
demo, and generate proof of concepts around these complex emerging
technologies and systems. Specifically, the CFTC lacks the legal
authority to partner and collaborate with outside entities engaging
directly with FinTech and innovation within a research and testing
environment, including when the CFTC receives something of value absent
a formal procurement. The general rule is that without such authority,
the CFTC must forego the increasing number of opportunities to engage
in research that may benefit the derivatives markets that the agency
oversees, as well as the CFTC's own activities.
The Commission would like the ability to partner, collaborate, or
engage in a cooperative agreement regarding emerging financial and
compliance technologies with persons or entities; Federal, state, or
local agencies or instrumentalities; or foreign governments or
international organizations. Legislation recently introduced by
Congressman Austin Scott provides such authority and would greatly
enhance the Commission's ability to keep pace with emerging technology,
explore its potential, and facilitate its adoption.
With respect to consumer education, the CFTC's Office of Customer
Education and Outreach (OCEO), which was established in 2011 to
administer the CFTC's consumer education initiatives, has played an
integral role in both authoring educational materials for consumers and
working with partners to spread the word about the CFTC's Bitcoin and
virtual currency resources.
OCEO is conducting outreach to various 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. Some examples of outreach include
coordinating with national nonprofits, Federal regulators and state
agencies to conduct webinars, educational campaigns and in-person
events. OCEO also provides partners with content to use for their
constituent outreach and communications, in order to amplify the CFTC's
customer education efforts. OCEO is also reaching intermediaries
through trainings that educate participants on the CFTC's fraud
prevention resources to protect and assist their constituencies.
In fact, last week OCEO, in conjunction with LabCFTC, issued its
fourth Customer Advisory about virtual currencies. This advisory warns
customers to use caution and to do extensive research before purchasing
virtual coins or tokens, including those that are self-described as
``utility coins,'' or ``consumption coins.''
Specifically, the advisory, titled ``Use Caution When Buying
Digital Coins or Tokens,'' warns a customer to view any promises or
guarantees of future value as a ``red flag.'' Since this market is
still very new, there is no commonly accepted standard to assigning a
value on a particular virtual coin or token. This is an important
reason to beware of coins or tokens sold today with the claim that they
can buy goods, services, or platform access in the future. Also,
businesses that are still in the proposal stage may use funds from coin
sales to start or grow their ventures. The advisory provides important
factors for customers to weigh that could impact the current or future
value of a coin or token.
Our Customer Advisories aim to give customers a greater
understanding of virtual currencies and help them make informed
investment choices. These advisories are part of the CFTC's broader
outreach program to the public regarding virtual currencies. In fact,
over the past 5 months, the CFTC has produced an unprecedented amount
of public educational materials on virtual currencies, all of which are
located on the Commission's dedicated ``Bitcoin'' web page at https://
www.cftc.gov/Bitcoin. Launched on December 15, 2017, the web page
features both consumer and industry-facing materials and includes a
backgrounder on the CFTC's oversight and approach to virtual currency
markets, a ``primer'' on virtual currencies, several customer
advisories on risks associated with speculating or investing in Bitcoin
and other virtual currencies, a fact sheet outlining the self-
certification process, and a CFTC-produced podcast on Bitcoin.
Additionally, other CFTC-produced podcasts on Blockchain and other
virtual currency related topics are available on the Commission's
website. For market participants, the weekly publication of the
``Commitment of Traders'' data includes open interest information on
Bitcoin futures which provides insight into the market dynamics of
these contracts.
As you all know, last December, two exchanges self-certified
several new contracts for futures products for virtual currencies.
These innovations impact the regulatory landscape and will require the
Commission to invest more in new technologies and tools that support
important surveillance and enforcement efforts.
Under the Commodity Exchange Act (CEA), Commission regulations, and
related guidance, CFTC-registered exchanges have the responsibility to
ensure that their Bitcoin futures products and their cash-settlement
process are not readily susceptible to manipulation. Additionally,
CFTC-registered clearing houses or derivatives clearing organizations
(DCOs) are required to have robust and comprehensive risk management
procedures in place to ensure that these contracts are sufficiently
margined and do not undermine the integrity of the DCO. The CFTC has
the authority to ensure our exchanges and DCOs comply with their
respective responsibilities. In addition, the CFTC has legal authority
over virtual currency derivatives in support of anti-fraud and
manipulation including enforcement authority in the underlying markets.
In May, our Division of Market Oversight staff issued guidance on a
new ``heightened review'' of virtual currency product self-
certifications that gives registered exchanges and clearinghouses
guidance for listing virtual currency derivative products.\4\ This
advisory will help ensure that market participants follow appropriate
governance processes with respect to the launch of these products. It
clarifies CFTC staff's priorities and expectations in its review of new
virtual currency derivatives to be listed on a designated contract
market or swap execution facility, or to be cleared by a DCO. The
advisory should help exchanges and clearinghouses effectively and
efficiently discharge their statutory and self-regulatory
responsibilities, while keeping pace with the unique challenges of
emerging virtual currency derivatives.
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\4\ CFTC Staff Issues Advisory for Virtual Currency Products (May
21, 2018), https://www.cftc.gov/PressRoom/PressReleases/7731-18.
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The CFTC Division of Enforcement is a premier Federal civil
enforcement agency dedicated to deterring and preventing manipulation
and other disruptions of market integrity, ensuring the financial
integrity of all transactions subject to the CEA, and protecting market
participants from fraudulent or other abusive sales practices and
misuse of customer assets.
The CFTC has been particularly assertive of its enforcement
jurisdiction over virtual currencies. It has formed an internal virtual
currency enforcement task force to garner and deploy relevant expertise
in this evolving asset class. The task force shares information and
works cooperatively with counterparts at the SEC with similar virtual
currency expertise.
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. These include:
(i) Gelfman Blueprint, Inc., which charged defendants with operating
a Bitcoin Ponzi scheme that fraudulently solicited
approximately 80 persons supposedly for algorithmic trading
in virtual currency that was fake, the purported
performance reports of which were false, and--as in all
Ponzi schemes--payouts of supposed profits to customers
actuality consisted of other customers' misappropriated
funds.
(ii) My Big Coin Pay Inc., which charged the defendants with
commodity fraud and misappropriation related to the ongoing
solicitation of customers for a virtual currency known as
My Big Coin;
(iii) The Entrepreneurs Headquarters Limited, which charged the
defendants with a fraudulent scheme to solicit Bitcoin from
members of the public, misrepresenting that customers'
funds would be pooled and invested in products including
binary options, and instead misappropriated the funds and
failed to register as a Commodity Pool Operator; and
(iv) Coin Drop Markets, which charged the defendants with fraud and
misappropriation in connection with purchases and trading
of Bitcoin and Litecoin.
These recent enforcement actions confirm that the CFTC, working
closely with the SEC and other fellow financial enforcement agencies,
will aggressively prosecute bad actors that engage in fraud and
manipulation regarding virtual currencies.
We have had and will continue strong inter-agency cooperation. The
CFTC has been in close communication with the SEC with respect to
crypto currency policy and jurisdictional considerations, and in
connection with our recent enforcement cases. We also are working on a
Memorandum of Understanding (MOU) with the SEC to streamline the flow
of information and clarity our regulatory responsibilities. We have
also been working with the U.S. Treasury and the Financial Stability
Oversight Council (FSOC) through its crypto currency task force. In
addition, we have been in communication with our foreign counterparts
through bilateral discussions and through international bodies like the
International Organization of Securities Commissions.
Financial Technology
In addition to LabCFTC's domestic activities, the Commission
continues to proactively work with international regulators on FinTech
applications to coordinate approaches and to share best practices. In
February of this year the CFTC and the UK's Financial Conduct Authority
(FCA) entered into an arrangement to collaborate and support innovative
firms through each other's FinTech initiatives--LabCFTC and FCA
Innovate. This is the first FinTech innovation arrangement for the CFTC
with a non-U.S. counterpart. We believe that by collaborating with the
best-in-class FCA FinTech team, the CFTC can contribute to the growing
awareness of the critical role of regulators in 21st century digital
markets.
The Technology Advisory Committee, under the sponsorship of
Commissioner Brian Quintenz, has been particularly active, having
already formed four subcommittees examining critical and timely topics
in detail. One subcommittee, focused on the modern trading environment,
is evaluating the true risks of algorithmic and automated trading,
private sector incentives and responses to controlling operational
risk, and any gaps therein where regulatory solutions are necessary.
Other subcommittees are addressing questions surrounding virtual
currency including suggesting self-regulatory policies for trading
platforms, Distributed Ledger Technology (DLT) and any associated
regulatory applications, and internal and external cybersecurity
practices and protocols. I look forward to a robust set of actionable
recommendations from the TAC in the months to come which the Commission
may consider, and I thank Commissioner Quintenz for his leadership.
The CFTC and this Committee have an important role to play moving
forward when it comes to helping the Commission better understand how
these technological infrastructures work and impact our regulatory
space, and how to best regulate them.
Cross Border Agreements
The Commission continues to remain focused on the potential impact
of Brexit on the U.S. derivatives markets. We understand the
unprecedented challenges facing the EU and the United Kingdom in coming
to agreement on how their markets, services, and people will function
post Brexit; however, from a financial markets perspective, we remain
concerned that EU efforts to ensure control over euro-denominated
contracts currently cleared by UK clearing houses or central
counterparties (CCPs) will unfairly and inappropriately impact our U.S.
CCPs.
This past year, I, along with my fellow Commissioners, have engaged
with our European counterparts to discuss our concerns with the
extraterritorial reach of their new legislation. I have spoken to this
Committee on previous occasions about how this new legislation proposed
by the European Commission would create a new European framework to
regulate and supervise CCPs.
We fully support, and believe the EU, as a sovereign political
entity, has the right to amend and revise its laws and regulate the
entities that operate within its jurisdiction. Moreover, we welcome any
and all efforts in the EU to enhance the regulation and supervision of
its domestic CCPs. However, with respect to the treatment of U.S.
domiciled CCPs, we steadfastly oppose the renegotiation of the 2016
equivalence decision between the European Commission and the CFTC. We
expect the EU to honor its obligations under the 2016 equivalence
agreement regardless of how Brexit might impact the EU's ability to
risk manage the clearing of euro-denominated contracts in the UK. I
have stated very clearly that we will not renegotiate this agreement.
Further, it remains my position that our U.S. CCPs, which are among
the most robust and resilient in the world, should not be required to
comply with EU law on top of having to comply with U.S. law in order to
provide clearing services to EU market participants. This would create
unnecessary regulatory and supervisory burdens and increase costs on
U.S. businesses. The fact is that EU law is different than U.S. law.
CFTC statutes and regulations have evolved over the course of more than
forty years and are uniquely formulated to address our domestic
derivatives markets--predominantly our futures markets. Our domestic
markets are not identical to those of the EU--and the nature of our
markets is reflected in our laws. This experience and practice is not
recognized in EU law, creating situations where regulatory measures,
which are critical to U.S. futures markets, would be viewed as
impermissible under EU law. We cannot, and will not, allow EU
authorities and EU law to dictate what is appropriate in our domestic
financial markets. American derivatives markets must continue to be
regulated under American law by U.S. regulators overseen by this
Committee of the U.S. Congress.
I believe if the situation were reversed, my European colleagues
would hold the same position. I know that this Committee has supported
me on this position, and I thank you for that.
The best way forward as I have consistently stated, is through
deference. Regulatory and supervisory deference is a key principle to a
cross-border approach that fosters economic growth and resilience
without jeopardizing the bespoke laws or practices that underpin the
domestic derivative markets around the world. It gives us the best of
both worlds--it builds harmonization between markets and preserves the
ability of primary regulators to act and regulate their markets as
appropriate. I believe that the 2016 equivalence agreement achieved
this balance.
When it comes to U.S. CCPs, we insist that the parties stay true to
the terms of the 2016 equivalence agreement, give proper assurances
that U.S. CCPs will not be treated differently than they are now, and
pledge support for deference as the governing principle for how we
regulate and supervise each other's CCPs today and in the future. In
fact, deference is the cornerstone for how the CFTC approaches the
cross-border supervision of European CCPs. It is deference that
supports strong cross-border markets, recognizes our commonalities, and
builds upon the strengths of our respective jurisdictions.
With respect to the CFTC's participation in international standard
setting fora, we continue to play a very active role in international
bodies like the International Organization of Securities Organization
(IOSCO) in order to build consensus and cooperate in the regulation of
the global financial markets. These global markets are over hundreds of
trillions of dollars in market size. For example, the approximate size
of just the global exchange-traded derivatives market is U.S.$100
trillion. The exchange-traded derivatives market, thus, compares
favorably to the global equity markets, which are also estimated to be
about U.S.$100 trillion in size. When one considers in addition the
over-the-counter derivatives markets, which has an estimated gross
notional value of over U.S.$500 trillion, the global derivatives market
represents a substantial share of the markets overseen by IOSCO
members.
I believe the CFTC needs to be a leading participant in IOSCO and
other international bodies. The CFTC currently chairs the following
international committees and groups and serves as a member of many
other ones:
Chair, IOSCO Cyber Task Force
Chair, IOSCO Committee on Derivatives
Co-Chair, CPMI-IOSCO Data Harmonization Group
Co-Chair, FSB Working Group on UTI and UPI Governance
Chair, OTC Derivatives Regulators Group
Co-Chair, Derivatives Assessment Team
Co-Chair, CPMI-IOSCO Policy Standing Group
I also recently served as co-chair of the 2018 Salzburg Global
Seminar's Finance Forum and spoke about issues related to Artificial
Intelligence, FinTech, Cybercrime and Big Data.
As overseers of the world's oldest and largest derivatives markets,
the CFTC must play a leadership role in the development of common
standards for global derivatives markets. Under my chairmanship, the
CFTC will continue to play that role.
Enforcement
Through robust enforcement of our laws and regulation, the
Commission is sending a clear signal to the marketplace about our
seriousness in punishing bad behavior and compensating victims.
As of June 5th, the Commission has filed 13 manipulative conduct
cases in 2018--the most manipulation cases the CFTC has ever filed in a
single year, which was last year (12 cases), including an Order
settling charges against French bank Societe Generale S.A. for
manipulation and attempted manipulation of and false reporting in
connection with both the London Interbank Offered Rate (LIBOR) and Euro
Interbank [Offered] Rate (Euribor). The civil monetary penalty of $475
million was the third largest in the history of the Commission. It
addresses misconduct that spans more than 6 years, from 2006 through
mid-2012. The Commission worked in collaboration with the Department of
Justice, the Federal Bureau of Investigation, the Autorite des Marches
Financiers in France, and the UK Financial Conduct Authority. This is
the type of enforcement cooperation that I undertook to pursue upon
becoming Chairman.
But it is not just about the numbers. And it is not cooperation for
the sake of cooperation. It is about removing bad actors from the
marketplace, making the markets safer and more durable for responsible
traders and the participants that use our markets. We also believe
that, to maximize deterrence, we must work with our criminal law
enforcement partners to ensure that wrongdoers face not just civil
liability, but also the prospect of criminal prosecution and time in
jail.
In January 2018, the CFTC filed manipulation and spoofing cases
against six individuals in coordination with the Department of Justice
(DOJ) and the Federal Bureau of Investigation, which brought criminal
charges against the same individuals. This constitutes the largest
coordinated prosecution of on-exchange trading abuses with the criminal
authorities in the history of the CFTC. These prosecutions were equally
significant for DOJ: in a press statement, the Assistant Attorney
General characterized it as ``the largest futures market criminal
enforcement action in Department history.'' \5\
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\5\ Acting Assistant Attorney General John P. Cronan Announces
Futures Markets Spoofing Takedown, United States Department of Justice,
(Jan. 29, 2018), available at https://www.justice.gov/opa/speech/
acting-assistant-attorney-general-john-p-cronan-announces-futures-
markets-spoofing.
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I also pledged last year that the agency would look to benefit from
cooperation with civil and criminal capabilities of other Federal and
state regulators and enforcement agencies. We have been making good on
that pledge. Two weeks ago, I signed an important agreement, marking a
milestone in the area of U.S. Federal and state financial fraud
detection and prosecution. That was an MOU between the CFTC and
individual state securities commissions which will focus our collective
resources to better uphold the law.\6\
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\6\ CFTC, NASAA Sign Agreement for Greater Information Sharing
Between Federal Commodities Regulator and State Securities Regulators,
North American Securities Administrators Association (May 21, 2018)
http://www.nasaa.org/45123/cftc-nasaa-sign-agreement-for-greater-
information-sharing-between-federal-commodities-and-state-securities-
regulators/.
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This MOU establishes protocols and procedures, for the access, use,
and confidentiality of information and treatment of non-public
information in the course of law enforcement. It creates a framework
for cooperation that will result in:
Leveraging state and Federal resources to support
enforcement actions;
Enhancing the impact of enforcement efforts and their
deterrent effect;
Encouraging the development of consistent and clear
governmental responses to violations of the Commodity Exchange
Act;
Preventing the duplication of efforts by multiple
authorities; and
Facilitating vital exchanges of information and
communications between the Commission and State Securities
Administrators.
Complementing its enforcement efforts, the CFTC has also
strengthened its Whistleblower Program, and provided whistleblowers
additional incentives to report wrongdoing to the CFTC. In May 2017, to
further protect whistleblowers, the CFTC added protections prohibiting
employers from retaliating against whistleblowers and from taking steps
that would impede would-be whistleblowers from communicating with the
CFTC about possible misconduct.
We believe those incentives are working. On July 12, 2018, the CFTC
announced an award of approximately $30 million to a whistleblower who
voluntarily provided key original information that led to a successful
enforcement action. The award is the largest award made by the CFTC's
Whistleblower Program to date. In FY 2017, the Commission received a
record number of whistleblower reports--nearly twice as many as in any
other year, and FY 2018 is on track to receive nearly twice as many as
in FY 2017.
The Commission takes its enforcement efforts very seriously. We
pride ourselves on being a premier Federal civil enforcement agency
dedicated to deterring and preventing manipulation and other
disruptions of market integrity. We will not stop.
Open Meeting on Indemnification, Volcker Rule, and Swap Dealer De
Minimis
On June 4, 2018, the CFTC held an open meeting for input on several
important matters. This was the first open meeting I conducted as
Chairman of the agency. We considered a final rule for swaps data
access and two proposed rules concerning the Volcker rule and the de
minimis swaps dealing exception.
First, let's turn to the swap data access provisions of Part 49 of
the CFTC's rules, also formerly known as the swap data repository (SDR)
indemnification rule.
Eight years ago, Congress included in the Dodd-Frank Act a
requirement that foreign regulators had to indemnify both the U.S. SDR
and the Commission for any expenses arising from litigation relating to
information provided by the SDR. This requirement was driven by U.S.
concern to protect data privacy, an issue that is very much in the news
today. Unfortunately, foreign regulators were unable or unwilling to
provide the required indemnification, hindering the ability to share
swaps data. It also hampered access by foreign derivatives regulators
to data in U.S. SDRs necessary to understand the risks their regulated
entities are assuming and the impact of such risks on the broader
markets.
With the implementation of our new rule, I believe we have made
significant progress towards cross-border data sharing and enhancing
transparency in the global swaps market. Such data sharing may
facilitate greater cooperation among market and Prudential Regulators,
as well as among foreign and domestic regulators, and will provide more
effective financial market oversight, expand data driven policymaking,
and improve early warning systems that might ultimately reduce the
probability or severity of a crisis.
Then there is the Volcker rule. Section 619 of the Dodd-Frank Act
added a new section 13 to the Bank Holding Company Act of 1956 (BHC
Act) that is commonly known as the Volcker rule. The new section
generally prohibits ``banking entities'' from engaging in ``proprietary
trading'' for the purpose of selling financial instruments to profit
from short-term price movements. Section 13 of the BHC Act also
generally prohibits banking entities from acquiring or retaining an
ownership interest in, or sponsoring, a hedge fund or a private equity
fund (``covered funds'').
Recognizing that the ``devil is in the details,'' Congress left the
finer points of developing the Volcker rule regulations to five
agencies: the Board of Governors of the Federal Reserve System (Board),
the Federal Deposit Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), the Securities and Exchange
Commission (SEC), and the CFTC (together, the ``Agencies''). The
Agencies issued the final rule in December 2013.
Since then, there has been a growing concern that the regulators
first pass at the Volcker rule was not ideal in several respects.
Specifically, the current rule causes confusion as to what is
acceptable activity, presumes unacceptable activity in various cases,
and imposes highly intensive compliance burdens in all cases, unfairly
benefitting large Wall Street banks over smaller regional ones.
The amendments to the Volcker rule seek to simplify and tailor the
Volcker rule to increase efficiency, right-size firms' compliance
obligations, and allow banking entities--especially smaller ones--to
more efficiently provide services to clients. It adopts a risk-based
approach that would rely on a set of clearly articulated standards for
both prohibited and permitted activities and investments. It is the
product of a collaborative effort with the Federal Reserve, FDIC, OCC,
and SEC. It is based on our collective implementation experiences over
the past several years.
This proposal will provide banking entities and their affiliates,
including a number of swap dealers, FCMs, and commodity pools subject
to CFTC oversight, with greater clarity and certainty about what
activities are permitted under the Volcker rule. For the CFTC,
``banking entities'' subject to the Volcker rule include primarily swap
dealers and FCMs that are either insured depository institutions,
certain foreign banking entities operating in the United States, and
affiliates of either of those two categories. In addition, certain
commodity pools that are owned or controlled by any such entity may
also be banking entities or covered funds under the Volcker rule.
Finally, I want to turn to the proposal for the swap dealer de
minimis definition. As you know, last year I requested that the
Commission postpone a decision on the de minimis threshold for a year,
delaying implementation until the end of this year. That decision was
disappointing to some, including my fellow Commissioners, who said they
were then ready to move forward with a proposed rule. Yet, as I told
Congress at the time, I did not just want to address the de minimis
threshold; I wanted to get it right.
I believe the staff has had adequate time to analyze the most
current and comprehensive trading data and arrive at a recommendation
for the best path forward in terms of managing risk to the financial
system. The staff has provided Commissioners with full access to the
data they have used in their analysis. They have also conducted
additional and specific data analyses requested by Commissioners. The
data shows quite clearly that a drop in the de minimis definition from
$8 billion to $3 billion would not have an appreciable impact on
coverage of the marketplace. In fact, any impact would be less than one
percent--an amount that is truly de minimis.
On the other hand, the drop in the threshold would pose unnecessary
burdens for non-financial companies that engage in relatively small
levels of swap dealing to manage business risk for themselves and their
customers. That would likely cause non-financial companies to curtail
or terminate risk-hedging activities with their customers, limiting
risk-management options for end-users and ultimately consolidating
marketplace risk in only a few large Wall Street swap dealers.
That is why I think the proposed rule rightly balances the mandate
to register swap dealers whose activity is large enough in size and
scope to warrant oversight without detrimentally affecting community
banks and agricultural co-ops that engage in limited swap dealing
activity and do not pose systemic risk.
Leaving the threshold at the $8 billion level allows firms to avoid
incurring new costs for overhauling their existing procedures for
monitoring and maintaining compliance with the threshold. It fosters
increased certainty and efficiency in determining swap dealer
registration by utilizing a simple objective test with a limited degree
of complexity. And it ensures that smaller market makers and the
counterparties with which they trade can engage in limited swap dealing
without the high costs of registration and compliance as intended by
Congress when it established the de minimis dealing exception to begin
with.
Both the Volcker and the de minimis rule are proposed rules that
are now open for public comment. We look forward to getting feedback on
both and will work towards completing final rules by the end of 2018.
Agency Reform and the KISS Project
Since becoming Chairman, I have made efforts to normalize
operations and practices, and found opportunities to reinvest and
maximize current resources. That means a return to greater care and
precision in rule drafting; more thorough econometric analysis; and a
reduced docket of complex new rules and regulations to be absorbed by
market participants.
The KISS initiative launched last March included a review of rules
and processes, and the invitation for public comment to collect ideas
on how the CFTC can be a more effective regulator. The effort has
produced a tiered list of significant actions that will lessen
regulatory burdens.\7\ Recently, for example, the agency unanimously
approved an amendment replacing the complex and confusing lettering for
defined terms with a simple alphabetical list.\8\ The replacement will
remove unnecessary complexity from our rules and should help make
regulatory compliance less burdensome.
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\7\ Michael Gill, Chief of Staff, U.S. Comm. Fut. Trading Comm'n,
Remarks at the National Press Club, CFTC KISS Policy Forum, Washington,
D.C. (Feb. 12, 2018), available at https://www.cftc.gov/PressRoom/
SpeechesTestimony/opagill2.
\8\ J. Christopher Giancarlo, Chairman, U.S. Comm. Fut. Trading
Comm'n, We're Making Government Function More Efficiently for Taxpayers
and Market Participants (Feb. 15, 2018), available at https://
www.cftc.gov/PressRoom/PressReleases/pr7696-18.
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Internally, we have embraced the Administration's Reform Plan
concept and have implemented in-depth organizational reviews to ensure
that the agency is staffed to provide the most effective services to
the American taxpayer. This ongoing effort has already produced
results. Part of this effort included leveraging existing resources and
knowledge gained from enforcement actions and surveillance efforts to
provide timely consumer education materials to the public regarding
virtual currencies.
Swaps Reform
At the end of April, I released a White Paper on swaps reform
called ``Swaps Regulation Version 2.0.'' The White Paper was co-
authored with Bruce Tuckman, the CFTC's Chief Economist. This White
Paper analyzes the range of academic research, market activity, and
regulatory experience within the CFTC's current implementation of swaps
reform. It explores and considers a range of improvements to the
current reform implementation that is pro-reform, aligned to
legislative intent, and better balances systemic risk mitigation with
healthy swaps market activity in support of broad-based economic
growth.
We now have more than 4 years of U.S. experience with the current
CFTC regulatory framework for swaps and have learned from its varied
strengths and shortcomings. Four years provides a significant sample
size to evaluate the effects of these reforms and their implementation.
Based on a careful analysis of that data and experience, we are in
position to address flaws, recalibrate imprecision and optimize
measures in the CFTC's initial implementation of swaps market reform.
Rule Harmonization and Inter-Agency Coordination
I believe that Congress and the American people expect regulators
to communicate and coordinate closely on issues where our regulatory
interests are complementary or overlapping.
Soon after Chairman Clayton was sworn in as Securities and Exchange
Commission (SEC) Chairman, we began discussing ways to ensure that our
respective agencies are working together in areas where our regulatory
interests are complimentary or overlapping. Now, almost 8 years after
the Dodd-Frank Act officially required the CFTC and SEC to ``consult
and coordinate . . . for the purposes of assuring regulatory
consistency,'' \9\ I am pleased to say that both agencies are
undertaking an active and cooperative review of our Dodd-Frank
regulations. With the helpful assistance of Commissioner Quintenz, CFTC
staff has been actively engaged with our SEC counterparts--and soon
jointly with outside stakeholders--to identify areas ripe for further
alignment.
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\9\ Section 712(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. Law No. 111-203, (July 21, 2010).
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I am optimistic this review process will lead to regulatory changes
that will enhance our oversight efforts while reducing unnecessary
complexities and lessening costs for both regulators and our shared
market participants.
In addition, since December of last year, I have been meeting with
my counterparts at the Federal Deposit Insurance Corporation (FDIC),
Bank of England, and the Federal Reserve to discuss resolution of
Systemically Important Designated Clearing Organizations (SIDCO). As
you know, Title II of the Dodd-Frank Act provides for the orderly
resolution of a SIDCO should authorities decide to intervene. Title II
also provides for the appointment of the FDIC as receiver, given its
historical experience in resolving banks. The CFTC, however, has
indispensable expertise as the primary regulator of swap CCPs. As such,
it is critically important that our agencies understand each other's
roles and expertise--before a crisis happens. Since our initial
meetings, we are now coordinating and meeting regularly with the
Federal Reserve and the Bank of England, recognizing the global nature
of derivatives clearing. These meetings have been extraordinarily
cooperative and productive. We've taken the opportunity, supported by
our respective staffs, to exchange information, share analysis, and
collaborate to develop and hone our respective strategies to address
these extremely low probability--but extremely high consequence--
contingencies.
Obviously, our expertise with clearing comes from our constant
monitoring and oversight of CCPs. A key part of this oversight is
through direct examinations of CCPs. In the case of SIDCOs, title VIII
of Dodd Frank provides that the CFTC is the primary regulator. Early in
my tenure, then Governor Jay Powell and his staff from the Federal
Reserve visited the CFTC to meet with me and our CCP examinations staff
in an effort to identify policy areas of agreement and improve
collaboration on cyber security, default, liquidity and performance of
margin models of SIDCOs. The teams are sharing analysis, information,
and supervisory experiences in an attempt to minimize the number of
policy concerns and to agree upon examination programs for these CCPs.
Finally, another area of crucial agency coordination is interest
rate benchmark reform. For over 5 years now, CFTC has been working very
closely with the Board of Governors of the Federal Reserve System on
efforts to develop risk-free interest rate benchmarks. The Market Risk
Advisory Committee (MRAC,) under the leadership of Commissioner Behnam,
recently hosted an important public meeting during which CFTC staff,
the Federal Reserve, Federal Reserve Bank of New York and market
participants discussed ongoing efforts to transition U.S. dollar
derivatives markets away from London Interbank Offer Rate (LIBOR) to
the Secured Overnight Funding Rate (SOFR). The MRAC meeting was the
first piece of a larger multi-year effort to ensure a smooth transition
of trillions of dollars of CFTC-regulated derivatives, which are pegged
to LIBOR. This is a critically important task considering the role
benchmarks, like LIBOR, play in the real economy, including home
mortgages, student loans, and auto loans. The MRAC is in the process of
forming a subcommittee in an effort to consider providing
recommendations to the CFTC on regulatory issues raised by the Federal
Reserve's Alternative Reference Rates Committee involving the amendment
of existing derivatives contracts and Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act among other issues.
Protecting Our Financial Markets
Clearinghouses
One of the Commission's primary oversight responsibilities is to
oversee derivatives clearing organizations (DCOs). The Commission
expects the number of (DCOs) to continue to increase in FY 2019. As the
number of DCOs increase, the complexity of the oversight program will
increase. I believe that it is imperative that the Commission
strengthen its examination capability to enable it to keep pace with
the growth in the amount of swaps cleared by DCOs pursuant to global
regulatory reform implementation. As the size and scope of DCOs have
increased, so too has the complexity of DCO's risk management programs
and liquidity risk management procedures. The Commission under my
leadership will continue to work to enhance its financial analysis
tools used to aggregate data and evaluate risk across all DCOs.
Economic Modeling and Econometric Capabilities
One of the most important jobs facing this agency now and in the
coming years is to boost the CFTC's ability to monitor systemic risk in
the derivatives markets by increasing both its analytical expertise and
its capacity to process and study the voluminous data provided by
market participants since the passage of the Dodd-Frank Act.
Investments in these capabilities will allow for the expansion of
sophisticated quantitative and econometric analyses that are necessary
for risk modeling, stress tests, and other stability-related
evaluations, especially with respect to central counterparty
clearinghouses. These analyses will, in addition, enhance the quality
of CFTC policy development, rulemaking and cost-benefit considerations.
Let me highlight one example. It has been widely recognized for the
longest time that notional amounts are a poor measure of the size of
swaps markets. But early this year, using our regulatory data, the
Office of the Chief Economist introduced a new measure of the size of
interest rate swaps markets called ``Entity-Netted Notionals,'' or
ENNs. Making some very basic risk adjustments, like offsetting the long
and short positions of two counterparties, analysis reveals that $228
trillion notional amount of interest rate swaps corresponds to about
$17 trillion ENNs, which is comparable to other fixed income markets,
like $17 trillion of U.S. Treasury securities outstanding. In this way,
the ENNs metric--which we plan to extend to other products--raises the
level of discussion about derivatives markets and may ultimately lead
to better calibrated regulatory thresholds.
Cyber Security
As I have mentioned in the past, cyber security is critically
important to protecting infrastructure and financial markets around the
world. As market leaders and regulators, we must take every step
possible to thwart cyber-attacks that have become a continuous threat
to U.S. financial markets. Our understanding of the cyber threat must
develop in pace with the constant evolution of the threat itself.
As we learn, we must engage in discussions with the DCOs about
their cyber defenses and threat resiliency and recovery. It is through
the oversight and examination of systems safeguards that the Commission
helps to ensure that DCOs are prioritizing cyber security activities.
The same vulnerabilities hold true in the case of futures commission
merchants where customer accounts hold records and information that
requires protection. We as an agency must work hard to ensure that
regulated entities live up to their responsibility to ensure their IT
systems are adequately protected from attacks and customers are
protected.
As an agency, the Commission is faced with growing pressure to
protect terabytes of data and maintain compliance with the Federal
Information Security Modernization Act and Office of Management and
Budget mandates. Looking forward, I am hopeful that next fiscal year
with additional funding we will be able to enhance our internal cyber
security including implementing additional cyber-attack sensors and
defenses to further protect the market data we collect.
Conclusion
Thank you for this opportunity to update you on progress of the
CFTC. I am pleased to report that the agency is on sound footing in the
conduct of its statutory mission. I believe the CFTC is an agency upon
which the American people can look with satisfaction in terms of
taxpayer value, effective oversight of U.S. markets and mature
development of public policy amidst the rapid pace of change of Twenty-
first Century financial markets.
With the proper balance of sound policy, regulatory oversight, and
hard work, America's deep, liquid, and sensibly regulated derivatives
markets will allow us to meet the challenges of the future and ensure a
healthy U.S. economy where our citizens can flourish. This is how we
can best serve the nation and the world. This is how we can walk into a
virtual future with resources, insight, leadership, and effectiveness.
The American people would expect nothing less.
Thank you.
The Chairman. Thank you, Chris.
The chair will remind Members that they will be recognized
for questioning in order of seniority for Members who were here
at the start of the hearing. After that, Members will be
recognized in order of arrival. I appreciate Members'
understanding.
With that, I recognize myself for 5 minutes.
Chris, in my opening statement I mentioned the European
Commission wanting to reset the overall regulatory scheme. Can
you flush out the current state of affairs or where we are with
respect to that? Clearly the difference we had before was,
certainly Mr. Pearson's statement made a lot of sense 8 years
ago. Would you bring us up to speed on where we are today?
Mr. Giancarlo. Conversations are ongoing. Relationships are
cordial. The conversations are honest and the dialogue is
direct and candid.
Having said that, we are not much further than we were the
last time I reported to you on this matter. I am sorry to say
that the European Parliament, while they have made small
concessions in the current proposal that is before the
Parliament, it still, in substance, would require the
imposition of European substantive law on American
clearinghouses.
That means that our clearinghouses in Chicago and New York
would have to, in addition to following U.S. law set by the
American Congress, follow European substantive law set by the
EU Parliament. I mean, it almost seems ludicrous, but that is
what is being proposed and I am not aware of any other area of
law where such would be the case. And if our laws were
identical in substance, maybe as a practical matter this could
find a way to work.
But the fact of the matter is our laws are quite different.
Our commodity futures markets and clearinghouses have been
around for, in some cases, 150 years, and have developed
practices that are unique to the American agricultural and
other financial communities.
One use, for example, is American clearinghouses allow use
of letters of credit, which are widely used by American
agriculture producers as collateral in the markets. European
law does not permit that.
But at heart, one of the things that I find most troubling
is that when you speak to our European counterparts, they will
tell you that what drives a lot of this is their frustration
that a few years ago, the London clearinghouse produced a
haircut, or discounted the value of certain collateral that was
posted, and the Europeans felt that a political decision should
have been made not to discount that collateral because it
concerned European bonds. Well American practice is to never
impose political decisions on the use of collateral by
clearinghouses. We don't bring political decisions to bear.
They do, and these are fundamentally different approaches to
the supervision of clearinghouses. And if their law applies and
our law applies, I don't know how we are going to reconcile
these two very different approaches to the use of collateral by
clearinghouses.
We have fundamentally different laws, different approaches,
and their desire is to see their law apply to our
clearinghouses, coincident with our own law applying. I just
don't know how this can be reconciled.
The Chairman. Can they point to a failure of our regulatory
regime to not properly protect, I understand the actions taken
by the London clearinghouse, but can they point to something
that didn't happen that should have happened, or something that
did and shouldn't have in our scheme that they say, ``Well, the
Americans just don't get it right.'' Are they making any kind
of comment about that at all?
Mr. Giancarlo. They are not. The answer is a simple no, and
the facts are that our regulatory scheme predates the CFTC. It
goes back to the 1930s when the Commodities Exchange Act was
first passed. In that time, our clearinghouses have never had a
major failure, including through the 2008 financial crisis when
our clearinghouses for futures commodities stood tall and
strong.
I am not aware of any deficiency in our approach. We have
different approaches, but that is to be expected.
Let's be candid here: American futures markets are the
world's largest. They remain one of the fastest growing
markets, and I would understand if European markets were the
second largest, but they are not the second. The Chinese are.
They are not the third and they are not the fourth. They are
maybe the fifth largest in the world, and the notion that the
world's fifth largest market would dictate the laws for the
world's largest market seems a little outside their lane, shall
we put it that way.
The Chairman. Well thank you, and I will have another
question on a second round perhaps, so with that, I yield back.
Mr. Peterson, 5 minutes.
Mr. Peterson. Thank you, Mr. Chairman.
As I mentioned in my opening statement, we are in the midst
of a sea change in finance with the transition away from the
LIBOR. The interest rate that was so easily manipulated during
the financial crisis. I applaud you for your participation in
the Alternative Reference Rate Committee's work to produce a
very sound replacement rate, but I do have concerns.
Replacing LIBOR will be a massive undertaking. In the
United States alone, the rate underpins almost $200 trillion in
derivatives, not to mention millions in student loans, credit
card payments, retail bank deposits, auto financing agreements,
and home mortgages. And yet, there is a growing concern that
Wall Street has yet to really engage in this difficult task of
making this transition.
Could a delay in the transition disrupt orderly markets,
and if so, what would it look like for end-users? And if the
market participants are reluctant to do so, what measures
should regulators or Congress consider to encourage them to
overcome the inertia they face right now?
Mr. Giancarlo. Thank you, Ranking Member. It is a very
important question, but I also want to express my condolences.
I know you lost your dad recently, and I haven't had a chance
to express that. I lost my dad 3 years ago, and he is never far
from my mind, and I am sure that is the case for you as well.
This LIBOR transition is a very important matter. As I am
sure you know, what has happened is when LIBOR first grew, it
was based upon a marketplace where the major global banks
funded their overnight funding requirements. It was an active
market that was a primary market for that overnight funding.
In the 30 or 40 years since, that market has really
diminished to not even a secondary or third source of funding.
Banks now fund their operations through repo markets, to the
point where the LIBOR market is not a real market anymore.
LIBOR rates are really not based upon trading activities. They
are based upon educated suggestions, I don't want to say
guesses, but professional judgment, shall we say, of a few
banks. It is only down to a handful of banks. Many of the banks
that were supplying LIBOR rates for years have dropped out, and
the remaining banks wish to get out but the Bank of England and
the Financial Conduct Authority in the UK has required them to
stay in for a limited period of time.
This is not driven by a desire to move away from LIBOR, it
is based upon a recognition that LIBOR is no longer a true
market. And yet, LIBOR, as a rate, as an institution, as you
rightly point out, runs through so many of our financial
contracts, everything from home mortgages to student loans. It
is vitally important that that huge infrastructure be based
upon a real sound marketplace.
Global regulators and the UK and the U.S., which are the
major users of the LIBOR rate, over the last few years it has
been a nonpartisan thing. It was actually my predecessor, Tim
Massad, who originally worked on this committee which is called
the ARRC Committee, the Alternative Reference Rate Committee,
representing the CFTC and supports the shift away, as does
Governor Powell, the Fed, as does the Governor of the Bank of
England, as well as the Chief Executive of the Financial
Conduct Authority.
We all recognize that something as important as LIBOR
cannot be based upon professional judgment. It has to be based
on a real marketplace.
Now all the concerns you raise, I share. Knowing we need to
do something doesn't make the task any easier than it is. It is
a tremendously difficult task, and I do want to commend my
fellow Commissioner, new Commissioner, Commissioner Behnam, who
is using our Market Risk Advisory Committee at the CFTC as a
way of fleshing out some of those very issues you mention.
I also think it is vitally important that also, as you
mentioned, that we take this discussion beyond this sort of
Washington, New York corridor here in the United States and get
out into the country, into banking districts from here to the
other coast, north and south, and make people aware that this
change is coming and what it entails, and work through the
various issues.
It would be foolish to minimize the complications and the
difficulties that this task entails, but it would be far more
foolish to do nothing about it and allow this large institution
of LIBOR to rest on such a thin and diminishing foundation.
Mr. Peterson. Thank you. Thank you, Mr. Chairman.
The Chairman. The gentleman yields back.
Mr. Lucas, 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman.
Chairman Giancarlo, one of the issues I have been
supportive of, and even cosponsored legislation about, is
making sure that bank capital requirements do not unduly
interfere with client clearing. And I want to recognize that
you have also supported that goal, and that your agency's
economists recently published a paper showing how capital
requirements, specifically the leverage ratio, is impacting
market liquidity, the distribution of risks in financial market
and access to key market infrastructure, such as central
clearing. I am concerned about the lack of an offset for client
clearing margin under the leverage ratio. Have you had
conversations with your Prudential Regulator colleagues about
how the leverage ratio is negatively impacting the markets?
Mr. Giancarlo. Yes, I have, active conversations.
Mr. Lucas. Do you think the banking regulators are finally
understanding this problem and potentially we might get some
action?
Mr. Giancarlo. Yes, I do. I have had some very good
conversation with Vice Chairman Quarles at the Federal Reserve
on this point, and I believe he appreciates it. In fact, we
spoke just as recently as 2 weeks ago, and although he has a
large docket of tasks there, it is something that will be on
their to-do list. I am hopeful.
Mr. Lucas. You recently signed an MOU with the SEC stating
that it will lead into greater harmonization of the title VII
rules. I very much appreciate your affirmative actions on this.
Can you give us your priorities for harmonization, and what the
likely timeframe for these efforts might be with the SEC?
Mr. Giancarlo. Yes. As you know, harmonization with the SEC
was an affirmative commitment under Dodd-Frank. I don't think
it reached the right level of prioritization and Chairman
Clayton and I both upon taking office decided to make it a
priority of our work. We have a very active harmonization
committee that meets regularly and has developed a laundry list
of issues. And I would put them into two categories. Some are
simple, practical ones such as where registrants have to file
two separate forms with each agency for a lot of the same
information. Can we get that onto one form and one filing?
Other areas are can we harmonize margin requirements for
similar or same products? Those are things that we are actively
engaged on, and I hope to have some good news on that in the
weeks and months to come.
Others are more long-term, as you know, Dodd-Frank assigned
about 90 percent of the over-the-counter swaps markets to the
CFTC and about ten percent to the SEC, and can we get some
greater harmonization with some of the core requirements of
swaps execution, swaps reporting, and swaps clearing? Some of
that will take longer range work. It might take some rule
changes. And then there is another range of issues that might
involve some of the other Prudential Regulators.
But all of these are on our to-do list, and I am really
optimistic that we are going to make some progress in this
area.
Mr. Lucas. Thank you, Chairman Giancarlo, and speaking of
rulemaking complexities, some rules in particular, and you
mentioned Dodd-Frank, mandate a large number of agencies to
weigh in. This sounds like a recipe for needless complexity.
The Volcker Rule is one such rule, and I will note that the
House has passed a bill this year designating the Fed as the
primary regulator on that.
But in your space, the margin rules require, by my count,
no fewer than seven regulators. I realize it might curtail the
CFTC's participation in some instances, but does it make sense
to your view to have one regulator per rule?
Mr. Giancarlo. I have two minds of this: seven is certainly
unwieldy and it makes the challenge difficult. My concern with
one is that there is often a different perspective of market
regulators, such as the CFTC and the SEC, and prudential bank
regulators such as the Fed or the OCC. And if the driving force
might be on the banking prudential regulated point, then some
of the concerns of market activity might not be fully
appreciated.
The supplementary leverage ratio is a good example of where
something that was really designed for bank capital really
under-appreciates the role of initial margin, variation margin
used in markets, or under-appreciates the role of market
making, the Volker rule and other area where it has a bias
against market making.
I think that market regulators have an important role to
play in bringing the market perspective to bear. If we could
find a way maybe to streamline the process, but make sure that
both market perspectives and bank capital perspectives were
harmonized, then I think that probably would be the right
outcome.
Mr. Lucas. Absolutely. I yield back, Mr. Chairman.
The Chairman. The gentleman yields back.
Mr. David Scott, 5 minutes.
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
Welcome, Chairman Giancarlo. It is good to see you again.
Last time we visited, you and I talked about cross-border, and
I want to get an update to that.
It appears to me that the United States and the EU have
come to an agreement, an agreement that appears to be good for
the United States and the EU and being able for American and
European businesses to do good business together.
But let me ask you, is it true that with all of what is
happening over there now, the EU wants to throw this agreement
out the window, which would really undermine new authority?
Give us an update on that, will you?
Mr. Giancarlo. Chairman Massad, and I must give him all the
credit in the world for his painstaking negotiation, close to 3
years with the EU to reach the agreement that was reached 2
years ago now in June of 2016 with the EU on clearinghouse
equivalency. And the foundation of that agreement was simple.
It was that we recognize the Europeans approach to
clearinghouse regulation and supervision is comparable, that is
our terminology, to U.S. law and our regulations had gone into
effect several years before the Europeans recognized our
clearinghouse supervision as equivalent, which is their
terminology. It is quite symmetrical. We fully disclosed to
them how we operate our 40 years of clearinghouse supervision
as a regulator, how we do things. They asked for a lot of
additional information. They actually asked us to make certain
changes in our rules. We made concessions to reach that
agreement. And we did. And that seemed to be working well. At
the time that agreement was reached, the European Commission
put out a statement that said this was a remarkable
achievement, and they were very, very pleased with what had
been done.
But then Brexit happened.
Mr. David Scott of Georgia. Yes.
Mr. Giancarlo. And Brexit seems to have changed everything.
And the European Commission now, as you say, appears to be
throwing out that agreement and starting over again with a
different approach. And the different approach is to look at
what they call third country clearinghouses and rank them. If
they are globally important, and not just limited to their
swaps volume--and some of our clearinghouses, which are some of
the world's largest, are largely in listed futures not in
clearing swaps. In the European approach now, even though the
clearinghouse equivalents was all about swaps, they are saying
if a clearinghouse is big enough, including their futures book,
then European law will apply to the entirety of their
operations.
Mr. David Scott of Georgia. Well let me ask you, is this a
major, number one priority for the CFTC to correct this?
Because if we don't, I can imagine it is going to put
operations like CME and others, ICE, all of them, in a very
precarious position.
What are your steps, going forward, now to correct this
imbalance?
Mr. Giancarlo. Yes. We have gotten to know each other over
the last few years. I think you know me. My style is not to
huff and puff and make threats. I just try to be as candid as I
can. Perhaps Chairman Massad, but I don't think any Chairman of
the CFTC has made as many trips to Brussels as I have, has
entertained more delegations from the European Commission as I
have, have tried to be as clear as possible as I have.
But to answer your question, if all of that doesn't
convince them otherwise, the way this would play out would be
Europe would come to us when they have passed their legislation
at some point, probably after Brexit, and say look, our law has
to apply to your clearinghouses. And I would say look, under
our Constitution, that is just not going to happen. Their next
step would then have to be to tell European firms that could no
longer use the services--now here is the problem with that
idea. For them, some of the world's most important products,
like dollar interest rate futures, only trade on the CME and
European pension funds and hedge funds need to use those
products.
Mr. David Scott of Georgia. My time is up, but I do want to
ask you, is there anything that we here in Congress can do to
strengthen your position, send a message to the European Union?
May I have an additional minute?
The Chairman. Without objection.
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
Mr. Giancarlo. Chairman Conaway, you pointed out that the
European Union has been contradictory just by their own words
before this Committee. The sense of this Committee has been
very clear. Certainly this issue has no partisanship. Both
Republicans and Democrats have been uniformly strong on the
issue.
Mr. David Scott of Georgia. Yes, that is correct.
Mr. Giancarlo. The Administration has been as well. The
President of the United States is concerned about this issue as
well. As well as Treasury, as well as the Fed, so the United
States Government across the board is unified on this issue,
and I have made that very clear to Europeans.
What I was starting to say is if they continue to press
this issue, it is their firms that are going to be hurting the
most because they will be cut off from access to products that
there are no substitutes for in European markets.
Mr. David Scott of Georgia. Thank you for that extra time,
Mr. Chairman.
The Chairman. The gentleman's time has expired.
Mr. Gibbs, 5 minutes.
Mr. Gibbs. Thank you, Mr. Chairman, and thank you, Chairman
Giancarlo, for being here, and thank you for holding steadfast
in this EU issue. Some of this has been answered already, but I
just want to highlight it a little bit.
You said it kind of came to the surface with Brexit, right,
correct? My first question is this. Where is the United
Kingdom? What do you think is going to happen with them on
this? Are they going to hold steadfast in the United Kingdom on
this issue, because they are part of that.
Mr. Giancarlo. One of the things that is vitally important
in my conversations with officials in Brussels is to make clear
to them that we take no sides in their dispute over Brexit with
the United Kingdom. And that is vitally important.
Yet, I will tell you that aside from this issue, I am
increasingly concerned about an unresolved Brexit which is
looming, it is next March, with no clear outcome in sight.
There are billions of dollars, bilateral swaps contracts,
between British and EU counterparties, that my understanding is
if there is not a resolution, those contracts will be thrown
into legal doubt and jeopardy. And I am concerned that Brexit
could have a systemic risk impact on the global economy if
there is not a clear resolution of it. And so the CCP issue is
part of a broader concern of the failure of both sides to the
Brexit debate to reach a measured and a mutually satisfactory
relationship here. And it seems like a lot of brinkmanship.
Again, I don't want to be critical of either side. It is
important for American officials to stay out, but we do have
our own markets to be concerned about and we do have concerns
about the global economy if there are not steps taken to
resolve this in a more----
Mr. Gibbs. Well, I agree that what the EU is doing is
outrageous.
Just quickly on all the trade talks going on, how does that
intertwine with this? Are there connections, or what do you see
on that?
Mr. Giancarlo. Undoubtedly the issue of trade, it adds to
the conversation, sometimes creates heated exchanges, and it is
very important for public officials like myself in our dealings
with the Europeans to take away from some of the heat.
I just came from a 2\1/2\ day conference in Salzburg, a
global conference with my European counterparts in which we had
a very good dialogue on some of these issues and took some of
the heat away. But there is undoubtedly that, and I know that
Members are going to want to talk about the impact of trade
discussions on our ag markets, and that is something we are
also watching very carefully as well.
Mr. Gibbs. I have a question on another area. Dealing with
the allegations by the U.S. aluminum end-users about serious
irregularities existing on the reporting to determine the price
of the Midwest premium in aluminum trading. Since January it is
up 140 percent. That seems a little disjointed from free market
principles. What is your take on that, what is CFTC doing to
make sure that the free market is functioning, or is not being
manipulated?
Mr. Giancarlo. Yes. We take this very seriously. Any
allegation of manipulation or fraud in the market, we take very
seriously.
I have met with the aluminum end-users and their group,
heard their concerns. I have also met with our team that
watches these markets to understand what they are seeing in the
markets, and although we don't comment on market surveillance
in specific matters, I can assure you that we take this
seriously. We watch this very seriously.
Now some of the aluminum consumers' concerns have to do
with not directly market manipulation, but just the construct
of the index, how it is used by Platts. We don't regulate the
construction of indexes. We monitor, though, underlying
markets, including indexes for fraud and manipulation. What is
important to know is if it is a matter of fraud and
manipulation, we monitor that very carefully, daily. We take it
very seriously. We meet with groups like the aluminum consumers
to make sure we understand their concerns and then follow up.
Mr. Gibbs. Yes, I just think we need to work with Members
of Congress on this and make sure that the CFTC is responding
in a timely fashion because the impact, as you know, has
ramifications that would not be good.
Mr. Giancarlo. In every district in the country, and if you
would like, I would be happy to sit down with your team and go
through a briefing on this.
Mr. Gibbs. Thank you, and I yield back, Mr. Chairman.
The Chairman. The gentleman yields back.
Ms. Kuster, 5 minutes.
Ms. Kuster. Thank you, Mr. Chairman and to Ranking Member
Peterson, for holding this hearing and thank you, Chairman
Giancarlo, for being with us again.
Mr. Giancarlo. Nice to see you again.
Ms. Kuster. We really appreciate it.
The American economy has come a long way since the
financial crisis of 2008, thanks in large part to the work of
the past Administration for pulling us out of the Great
Recession.
But I want to take a moment, if you would, Chairman
Giancarlo, could you compare the swaps market that existed
before 2008 with where we are now, and in particular, could you
comment on whether the current swaps market is safer at a
systemic level now than it was in 2008? I think that the
concern of our constituents is are we protecting consumers and
our economy from the type of fall that transpired in 2008?
Mr. Giancarlo. Thank you for that. The market is
dramatically different than it was then. At the time of the
crisis, there were a range of shortcomings in the over-the-
counter swaps market that were recognized in title VII of Dodd-
Frank, a series of reforms, all of which I supported and
publicly said so at the time, that would be to require a
greater amount of bilateral swaps to be sent through central
counterparty clearing, that swaps transactions would be
reported to swap data repositories, and that swaps would be
traded on licensed exchanges. In addition, swaps dealers would
be registered and licensed.
The CFTC took a global leadership role in implementing
those reforms following the passage of Dodd-Frank, and by 2014,
had adopted most of them. Again, I support those, and continue
to support those in my role as Chairman of the Commission.
To give you an idea of what has transpired, before the
crisis less than \1/3\ of interest rate swaps were cleared, and
I would say probably less than ten percent of credit default
swaps were cleared. Now the percentage is over 85 percent of
interest rate swaps and about 85 percent of credit default
swaps are now cleared through clearinghouses. A tremendous
accomplishment.
In the area of swaps data repositories, while we are still
working out harmonization issues with overseas regulators, an
enormous amount of swaps trade data is now reporting to swaps
data repositories, and just last month, we removed one of the
last hurdles to cooperation and harmonization with our European
partners for sharing swaps data, and that was something called
the Indemnification Rule, which we have now resolved.
And in the area of swaps execution, that is an area where I
support the reform, but I have been critical of the CFTC's
implementation of it because I thought our approach was modeled
on the futures market, which is inappropriate for the global
swaps market. They are different markets and need different
approaches, but more importantly because the approach the CFTC
took didn't conform with Congress' requirement that there be
flexibility in the modes of execution. However, I support the
reform, and continue to do so today.
In the area of dealer registration, that is largely
complete. The only issue is what is the de minimis cut off, and
that is something we recently proposed a final rule on. On all
of the core four reforms, I remain a supporter of them. They
are largely in place, and I think that the swaps market at
least is a safer place today than it was at the time of the
crisis because of those reforms.
Ms. Kuster. Thank you for the very articulate, succinct,
and almost plain English answer for our constituents to follow,
so I appreciate it. It is a complex area.
Thank you for leading to the de minimis reform, and I
wanted to just focus in on that. What do you believe would be
the impact if the proposed rule to tailor the compliance
requirements, my understanding is that $10 billion in trading
assets and liabilities would be known as significant activity,
$1 billion to $10 billion, moderate activity, and below $1
billion, limited activity. Is this designed to allow the CFTC
to focus your oversight on the larger actors, and how can I
reassure constituents that we are not going to take our eye off
the ball of oversight of actors that are quite active in the
markets, if you could?
Mr. Giancarlo. It is the right question, so thank you for
asking it.
With regard to dealers, swap dealers, what we are talking
is what is the cutoff below which they don't need to register?
Above $8 billion we have captured all of the Wall Street banks.
They are in the tens, if not the hundreds of billions, so they
are captured. The question right now is whether we lower the
threshold from $8 billion to $3 billion.
We have done an analysis that if it drops from $8 billion
to $3 billion, we are going to capture less than one percent of
the activity in the market, but the ones we would capture are
local utility companies, small ag trading firms, and small and
local banks that trade at a de minimis amount. But we won't
really capture them, because I have met with many of them and
what they say is if you drop the level, we will just drop our
activity level.
Ms. Kuster. Right.
Mr. Giancarlo. And so what does that mean for producers? It
means they are more dependent on Wall Street banks, not less,
and that is why I have come to conclusion that it should stay
at $8 billion, because we are not capturing any more Wall
Street banks. We are just going to capture small lenders who
they, themselves, won't register as swaps dealers. They will
then drop their activity level and really reduce their presence
in the market.
Ms. Kuster. Thank you, and I apologize to the Chairman. I
yield back.
The Chairman. The gentlelady's time has expired.
Mr. Austin Scott, 5 minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
Mr. Chairman, as you know, Dan Gorfine testified last week
at a hearing here, and I want to follow up with you on what
started last October when you outlined your plans for LabCFTC
for us. At the time it was in its infancy, just a few months
old, but it held almost 100 meetings, as I understand it, at
that stage with individuals.
Can you share more with us about who LabCFTC has been
meeting with, and what the goals are, what they are talking
about?
Mr. Giancarlo. Thank you so much. And so the numbers now
are well over 200 engagements with innovators, and the
innovators run the gamut from your classic small startup all
the way to large financial service providers that may be 20 or
30 years old and are now looking how these innovations will
help them modernize their operations.
LabCFTC really is our front door into this new regulatory
FinTech developments in the marketplace, and it is so important
to us to be able to understand these innovations that are
coming down the pike so fast.
Mr. Austin Scott of Georgia. In your written testimony you
mentioned the importance of the CFTC Research and Development
Modernization Act. It has been introduced by several of us on
the Committee. Can you give us a couple examples of how that
would actually help you do a better job at the Commission?
Mr. Giancarlo. Absolutely, and I want to thank you for that
legislation.
I remember when you and I first talked about this problem,
and I want to thank you for listening.
In my work on the Commission, I have been approached and
our staff has been approached even more by some of the most
interesting innovations taking place. They call these proofs of
concept or beta tests of some of the new technology, especially
in the area of Blockchain where there are six of the world's
major banks, some service providers and some technology shops,
coming together to build a prototype of a Blockchain system for
trading credit default swaps right in our jurisdiction or for
bank payments or other areas. And they have approached us and
said, ``Hey, CFTC, why don't you participate in this proof of
concept? Why don't you put a team on the ground in New York or
San Francisco or wherever it is to observe? Why don't we
actually create a node in the Blockchain that will be the CFTC
regulatory node where you can see everything that is going on
in Blockchain?'' And I say, ``I love it. We are going to do
this. Let's make this happen.'' And I go back and I sit down
with our General Counsel and he says, ``No, you can't do
that.'' ``Why?'' ``Because that would be a gift to the agency
and we are prohibited from taking gifts.'' Well then I said,
``What is the dollar amount? Can we use it from our budget? No,
because it will need to go through an appropriations process,
so they will need to compete with other firms,'' and by the
time we go through all that, this thing is already launched.
What your bill would allow us to do is to participate in
those programs and to accept that position without payment so
that we can learn, so that we can be understanding. And let me
tell you why it is so important, because we are falling behind.
Just 2 days ago, the Bank of England announced that they are
putting in a new bank to bank payment system in the UK, and it
is going to be Blockchain compliant. And they have had the last
4 years into what they call their Project Innovate to
participate in all these Blockchain beta tests that we have not
been able to participate in, and they have been able to get
comfortable with the technology and they are now incorporating
it. I feel like we are 4 years behind, because we do need to
test it. We do need to understand it. We need to see how it can
help us do a better job as regulators before I then come to
Congress and say, ``Okay, we do need money to build something
or buy it.'' First I want to be able to understand how it works
and get our team and our people really conversant with it.
Your bill would be very, very helpful to what we are trying
to do.
Mr. Austin Scott of Georgia. Well thank you for that, and
the sharing of data is technically considered a gift, and the
sharing of information is technically considered a gift today,
and that is where the challenge comes in when you have this new
technology that is in the development stages, and you have a
regulator that needs to be able to understand it if they share
it with you. I mean, technically that would be a violation.
Mr. Giancarlo. Yes, absolutely.
Mr. Austin Scott of Georgia. I look forward to working with
you on that, and thank you for your service to our country.
Mr. Giancarlo. Well thank you, and I thank you for really
listening, because this is a big concern of ours. You have been
very responsive. Thank you.
Mr. Austin Scott of Georgia. Thank you.
The Chairman. In that vein, if that Blockchain process was
already in place and running full speed, could your agency
demand that you have that node as a part of the access to it to
regulate it, and that would not be a gift at that point, right?
Mr. Giancarlo. Yes, I have to think of what authorizing
legislation we might need.
The Chairman. It would be in the same category as demanding
that folks share other data with you on trading.
Mr. Giancarlo. We do have subpoena authority. That is
probably the wrong way to get involved with these things by
going with a subpoena.
The Chairman. That is just the weird, ironic thing is that
after the horse is out of the barn, you can probably go in with
existing authorities, but trying to be on the front-end, we
have a problem.
With that, Ms. Plaskett, 5 minutes.
Ms. Plaskett. Thank you, Mr. Chairman, and thank you, sir,
for being here this morning.
My colleagues, of course, have touched on a number of
issues that I wanted to address with you.
Just quickly, when you talk about Brexit, you talked about
its impact on our economy and the global economy and how that
works, but can you also tell me what may be the impact of that,
and do you have concerns that the rules themselves may suffer
or may have an impact based upon Brexit and the move from
London to, perhaps, Frankfurt or Brussels or some other places?
Mr. Giancarlo. Yes, it is hard to know what the full impact
of what a disorderly Brexit would look like. It is even hard to
know how disorderly or what that may mean.
But recently, the Bank of England put forward a range of
concerns that I read very carefully that unless there are
certain assurances given by Brussels, billions of dollars, tens
of billions of dollars in derivatives that have been written by
British firms on European exposure, European firms--and some of
it concerns exposure to U.S. dollar, U.S. interest rates, other
issues, could be void or voidable the day after Brexit.
There is also concern as to whether the clearinghouse could
continue to service those contracts the day after Brexit.
I would have to do the math. What are we, 8 months away,
and these things tend to get resolved. I don't want to be
alarmist here, but every month that goes by that they are not
resolved, it is my job as a market regulator to be concerned
about what impact that might have on our financial markets, and
each month that goes by, my temperature level goes up a little
bit more, hoping to see resolution and clarity around these
issues. And here we are in July, but if it were January, my
temperature would be very high and I would be very concerned as
to what the impact would be on the global market. I am trying
to, in a very calm and measured voice, let my European
colleagues know on both sides of the Channel that they really
do need to address----
Ms. Plaskett. But you keep talking about the markets, but
does that affect the rules is my question?
Mr. Giancarlo. Well, it doesn't affect our U.S. rules.
Ms. Plaskett. Okay.
Mr. Giancarlo. But as we talked about with the
clearinghouse supervision issue, there is this question as to
whether European rules would apply directly to our
clearinghouses, and that is still unresolved as well.
Ms. Plaskett. Okay, great.
We had discussion just a few moments ago with one of my
colleagues about Blockchain.
Mr. Giancarlo. Yes.
Ms. Plaskett. Last week we held a full Committee hearing on
cryptocurrency, at which there was something of a consensus
view that emerged that Congress should consider providing the
Commission with the authority over cash cryptocurrency
exchanges. Now in your testimony, you are asserting that CFTC
doesn't have jurisdiction, but given that consumer protection
concerns are at issue with these markets and the vulnerability
of these markets, these exchanges to cyberattacks or fraud or
abuse, do you believe that Congress should expand your
jurisdiction to require those markets to register?
Mr. Giancarlo. First of all, I am going to clarify our
jurisdiction, and then if I may respond to your question.
Ms. Plaskett. Great.
Mr. Giancarlo. We have jurisdiction for fraud and
manipulation in those underlying markets, and we have been very
assertive in using that jurisdiction for fraud and
manipulation. We have enforcement jurisdiction.
What we don't have is jurisdiction that we have over our
futures exchanges to set standards by how they handle customer
accounts, cybersecurity, all the things that you just expressed
rightful concern with. If Congress were to consider
jurisdiction, it would be in that area.
I am not in a position yet to advocate a grant of
jurisdiction to the CFTC and I have a range of concerns around
that.
For one thing, it historically has not been the role of the
CFTC to set these type of requirements for cash markets, for
swap markets. We have historically been focused on the
derivative market with enforcement action against the
underlying, but not to set the standards. And so there would be
a change in precedent and change of the Commission's
orientation that I'm not ready to advocate for.
Second, there is a broad public policy conversation around
these markets and what should be the role of regulation. In our
great commodity futures markets, they were around for 100 years
before the CFTC came along, and they set their own requirements
and they policed themselves for a long time before regulators
came in.
Ms. Plaskett. Did they do it well though?
Mr. Giancarlo. For the most part, but at some point the
maturity level reached where it was appropriate, and I just
wonder what is the right--the point I am making is there may
come a time for the Federal Government to step in. The question
is what is the time?
The amount of ink that is devoted to cybersecurity far
outweighs the real role in the economy. It is a tiny
marketplace. The total capitalization of all cryptocurrency in
the world is probably less than one publicly-traded major big
board company. It is not a big marketplace. The best model that
I like to point to is the 1990s when a Democratic White House
and Republican Congress worked together around this new thing
called the Internet, and it took a: ``First, do no harm,''
approach. Regulation came slowly, but the technology evolved.
We need to stay close to it and we need to be careful, but we
can allow it to develop a little bit before necessarily we run
in with regulation. But we need to stay close to it, and we are
at the CFTC.
Ms. Plaskett. Okay, thank you very much. I yield back.
The Chairman. The gentlelady's time has expired.
Mr. Crawford, 5 minutes.
Mr. Crawford. Thank you, Mr. Chairman, and thank you for
being here today.
Mr. Chairman, can you explain why the European Commission
is considering altering the terms of the equivalence agreement
with the United States?
Mr. Giancarlo. Yes, as I remarked to Congressman Scott, it
is largely driven by Brexit. At the time we negotiated in 2016
our equivalency agreement, the world's largest swaps
clearinghouse, which is the London clearinghouse known as LCH,
it was prior to Brexit, and therefore it was in the EU. The
prospect of Britain leaving and the London clearinghouse
leaving the EU has caused the EU to really focus on how do they
oversee what they call third country clearinghouses, because
following Brexit, LCH will have gone from being in the EU to
being out of the EU, and therefore, how do they regulate that?
And I get that. I have told my European regulatory
counterparties let's have a conversation about what the right
role is for supervising LCH, because it is systemically
important when it comes to just rate swaps to the EU and to the
United States.
Just for an example, about 35 percent of what LCH clears is
Euro denominated, but about 45 percent is U.S. dollar
denominated. I understand they have a concern. We have a
concern. Let's talk about LCH. But I don't know how they then
go from there to saying that, ``Oh, and by the way, we are
going to move beyond our 2016 agreement and also apply the same
direct oversight to your U.S. domestic clearinghouses,'' which
in the case of the Chicago Mercantile Exchange, don't do a lot
of swaps clearing.
Mr. Crawford. Let's shift gears just a little bit and move
into the ag space.
In your testimony, you mentioned at the Kansas City
Agriculture Conference that panelists addressed the importance
of crop insurance as a critical risk management tools for
growers and the role that futures markets play to crop
insurance. I wonder if you can elaborate on the relationship
between crop insurance and using the futures market as a risk
management tool. Are there two ways we can make sure that the
two work more cohesively?
Mr. Giancarlo. That is a great question. I have thought a
lot about it. They are not direct substantives. Crop insurance
covers things that you can't get a derivative for or use a
future on, and there are futures for things that you can't get
crop insurance. But they do have a complimentary relationship,
and sometimes they can be substance for each other. And
sometimes I am concerned that the success of the crop insurance
program has perhaps taken some of the retail component
producers that might otherwise use futures markets out of the
futures market. And I am a big believer that healthy markets
are markets with a lot of diversity, everything from small
retail users all the way to big institutional traders, and when
I talk to American farmers, I will often ask a young farmer. I
say, ``Do you use the futures market?'', and they often say to
me, ``No, my dad did or my granddaddy used those markets. I
don't use them.'' And that is not good. If we have lost a
generation of users of our futures markets, that is not a
healthy environment.
And so I do think----
Mr. Crawford. Let me interject something there. Do you then
think that the fact that we don't see bona fide hedgers in the
market, essentially, particularly in the ag space, that we in
effect are creating greater volatility, reducing liquidity, and
relying more on spec traders for price discovery?
Mr. Giancarlo. That is a great question. One of my concerns
with the current position limits proposal of the CFTC that I
voted for to put out for comment was that the approach to bona
fide hedging was way too narrow and didn't allow farmers to use
hedges that they have used for generations, going back to their
granddad's, restricted their ability to do that. And it is very
important that our position limits allow for bona fide hedging
in its full extent.
Mr. Crawford. Let me ask you this then while I have 30
seconds left. Would you support an initiative if we were to
work with the NFA, for example, to authorize a series 3A
brokerage, a limited brokerage, limited to strictly ag hedging
to incentivize greater uptake from those end-users in the ag
space?
Mr. Giancarlo. I haven't thought about it or seen it, but
it is a very promising idea. Why not have something tailored
for ag hedgers? Why not?
Mr. Crawford. Okay, great. Thank you so much. I appreciate
your time. I yield back.
The Chairman. The gentleman yields back.
Mr. Evans, 5 minutes.
Mr. Evans. Thank you, Mr. Chairman.
Last year, you announced an expanded self-reporting and
compliance approach to enforcement. Can you please provide us
with an update on that policy? Has it led to a resolution of
greater number of enforcement cases, and has it been effective
thus far, and what needs to improve?
Mr. Giancarlo. Thank you for the question.
I pledged the day the White House announced my nomination
that there would be no let up on enforcement at the agency, and
there has been none.
This year alone we have brought 13 manipulation cases, and
the year is not over yet, and that is a record number of
manipulation cases. The previous record was set last year with
12. We just brought a $475 million settlement against one of
the world's global banks for market manipulation, so we have
been very aggressive. And I view the self-reporting case, which
by the way, came out of the Obama Administration Justice
Department, as another vehicle for being able to bring bad
actors to justice. Traditionally our enforcement actions came
from three sources. Those cases we uncovered through our own
research, those that were referred to by other law enforcement
agencies, and those that came from our whistleblower program.
All of those vehicles for covering wrongdoing and bringing
enforcement remain fully functional and the source of many
successful actions, but the fourth vehicle is now self-
reporting, and that is that if companies uncover misbehavior,
they bring it to us promptly. They take effective actions to
end the practice they uncover, and they be full open communal
disclosure to us of what they found and allow us to do our own
examination to see what we find. And the chips will fall where
they may, but if there has been full cooperation, we will
recognize that if there is a final settlement, and we will
recognize that. It provides us another vehicle, and I must say
that a number of the cases that we brought in the past year
have been a result of that self-referral case, and it is the
practice of the Southern District of New York from which our
new enforcement director comes. As I say, it was the practice
of the Obama Administration. And it was adopted at the CFTC on
a bipartisan basis. My fellow Democratic Commissioner at the
time when we adopted that policy fully supported it.
Mr. Evans. What needs to improve?
Mr. Giancarlo. Well, we need more resources, and it is in
our budget, we need additional resources. And I will tell you
where we really need it on the enforcement side. It is in
quantitative analytical skills.
I was just in Chicago. I met with our enforcement team
there and met with the guys that do the quantitative analysis
of trading data. It is very sophisticated information that they
are looking at, and we need people that have quantitative
skills to analyze trading data to find misbehavior in the
markets so then we can take enforcement action and go after it.
Mr. Evans. Thank you, Mr. Chairman. I yield back.
The Chairman. I thank the gentleman for yielding back.
Mr. Faso, 5 minutes.
Mr. Faso. Thank you, Mr. Chairman.
Mr. Giancarlo, thank you for your service and I appreciate
your leadership of the agency.
Recently, the Vatican issued a bulletin on the question of
credit default swaps and derivatives and their supposed
manipulation of the marketplace, and the bulletin raised a
number of questions about the efficacy of these financial
instruments.
You issued a response recently, it was just last week, to
the Vatican bulletin and I am wondering if you could take some
time to explain to us what the Vatican's position was in that
bulletin and how you responded.
Mr. Giancarlo. Thank you so much for the question, and nice
to see you again. I have to be up in your part of the world for
our summer vacation in a couple of weeks, the most beautiful
part of the State of New York. Thank you.
When the Vatican put out their bollettino, it was a wide-
ranging discussion of all manner of finance, everything from
executive compensation to different marketplaces. But what got
the press's attention was a few comments, basically one page,
about credit default swaps and the press loudly trumpeting even
the Vatican is saying that credit default swaps are evil.
And the first thing I did was get a copy of the letter
myself and read it carefully, and I was struck by the really
serious and sober tone of it, and the concern for the world's
poor that was expressed in that letter. And I thought those
headlines are going to be misleading as to really what is being
addressed here, and as the head of the world's only derivatives
exclusive regulatory agency, when a moral authority like the
Vatican is said to be censuring, and in some cases of the
letter, they actually do with certain aspects of the credit
default swaps market, I thought it was appropriate to put
forward a similar sober and thoughtful response that addressed
their current concerns directly in the same respectful way and
the same way that was concerned for those on what Pope Francis
calls the periphery of the world's society.
And so together with our Chief Economist, Bruce Tuckman, we
have issued a letter response to the Vatican's bollettino and
we talked about how these markets far from being actually
dangerous to the world's poor are actually vitally important,
and we point out a study that appeared in the Financial Times
about the vanilla trade in Madagascar and because the prices
fluctuate so widely, becomes a source of gang activity, of
extreme poverty, and the article makes a point that because
there is no futures market to level out those highs and lows,
derivatives play a vital role very much for the world's poor by
evening out fluctuations, whether it is price, or the cost of
electric power, or the price of food, and so they are vitally
important. But we also addressed the Vatican's specific
concerns about credit default swaps in three areas. I don't
want to take too much time on this, but what we wanted to do
was answer a serious analysis with a serious analysis from
people that are actually deeply in the markets. At the end of
the day, these markets are vitally important to our U.S.
economy and I wouldn't want it to be said that somehow they are
morally inappropriate, and so we addressed that directly.
Mr. Faso. Well I thank you for that, Monsignor, I mean,
Chairman, and I do think you made very good points in the
response. And because what happens is that these markets are
often misunderstood or they are viewed as overly complex and
difficult for the average person to understand, and I was very
happy to see that you laid it out in terms of how these markets
do stabilize prices, they provide price certainty for producers
as well as consumers, and that is a vital role and I applaud
you for taking that opportunity to clarify this issue.
Mr. Giancarlo. Thank you.
Mr. Faso. With that, Mr. Chairman, I yield back.
The Chairman. Thank you, sir. The gentleman yields back.
Mr. Soto, 5 minutes.
Mr. Soto. Thank you, Mr. Chairman, and Chairman Giancarlo,
it was great to rock out with you at the Rock and Roll Hall of
Fame event a while ago. You are very talented.
Mr. Giancarlo. Thank you. So are you.
Mr. Soto. But on a more serious note, I want to talk a
little about President Trump's tariff strategy. It was devised
outside of Congress and there is no coherent strategy that I
could discern right now, and I am worried that there is no end
in sight. I want an update on what is the effect of Trump's
tariffs on the futures market right now?
Mr. Giancarlo. Thank you for that, and while tariff policy
is outside of our jurisdiction, I will tell you that we take
any form of disruption, any type of event that drives
volatility in our ag commodity futures markets very, very
seriously.
Traditionally, the CFTC has relied on its surveillance unit
to look for bad actors in markets. One of the things that I
have done as Chairman is in addition to surveillance, created a
new market intelligence unit. Not all market activity is driven
by fraud and manipulation. It may be driven by tariff policy.
It may be driven by global events.
Mr. Soto. I am more asking for a general description of how
the markets are doing? Are we seeing losses in the futures
markets right now?
Mr. Giancarlo. We are seeing volatility in the markets, but
pinpointing it to specific global events is very difficult.
For example, just this morning, we get a daily report, I
receive a daily report saying that wheat prices are up. Wheat
prices are up because of apparently it appears that Europe is
having a very dry summer, maybe drought-like conditions, and so
the market is anticipating a price rise. We have seen price
falls in other areas.
Mr. Soto. Which commodities have we seen losses in right
now?
Mr. Giancarlo. Well so for example, in Mr. Faso's district
and in dairy markets, and I am sure Ranking Member Peterson is
also concerned with this, issues with regard to Canada and
Canada's activities in terms of buying or not buying American
milk. But some of that predated the current tariff, but it is
also tariff-related.
Mr. Soto. I understand. What are some of the other
commodities that are affected right now?
Mr. Giancarlo. Well, I couldn't tell you. I could get back
to you, if I can, to tell you which ones are----
Mr. Soto. I don't mean directly by tariffs or not, but
which commodities are experiencing losses right now in general,
regardless of what the cause is?
Mr. Giancarlo. Well, we are in a long-term downward trend
of ag prices generally. We are seeing over the last few months
a pick up in volatility in a number of ag products. Some of
that is driven by microevent, some of it is driven by more
long-term events. Certainly soybeans are one product that is in
the crosshairs of tariff policy right now, and it is a market
we are watching very, very carefully.
Mr. Soto. And what could the long-term effects be on
futures should we see a decline in foreign trade on a lot of
these commodities?
Mr. Giancarlo. Well, as you know, when it comes to ag
commodities, the United States is one of the world's major
exporters, and so the impact of tariffs will be reflected in
price. But sometimes it is hard to measure where that goes.
Mr. Soto. And then with regard to the plan to take about
$12 billion to utilize out of the Commodity Credit Corporation,
that program is usually for nature and crop cycles. What effect
could taking that to prop up potential losses from tariffs have
on the long-term futures market?
Mr. Giancarlo. I am only reading about that in the
headlines. I don't have any agency analysis to respond to that.
We could take a look at that and if we find something, get back
to you.
Mr. Soto. That would be helpful, because I am concerned. I
have been told that it may be deemed an improper subsidy in the
World Trade Organization, and could affect us in other ways.
With my remaining time, we talked a little bit last week
about how cryptocurrency could actually be a currency, a
future, a commodity, or a security, but I am worried if we gave
jurisdiction to all four traditional organizations that
regulate those that we could have burdensome regulations. If we
gave the CFTC primary jurisdiction over all these various
facets and the funding to do it, do you think that you all
would be able to be up for the job?
Mr. Giancarlo. CFTC is a great agency. I can't imagine many
jobs we are not up for. I will tell you, though, that we are
not traditionally a retail market regulator. The SEC, CHOPS, on
the retail side are probably more well-honed over the decades
than ours in that regard.
As I said to Representative Adams, this is something that
we should take a cautious and step-by-step approach to. As much
ink has been shed on cryptocurrencies, it is still a relatively
small market. I don't want to diminish the harm that can come
to retail participants, and we have been working with self-
regulatory organizations like the NFA to make sure that they
are putting out warnings to market participants, and we
ourselves are doing our own consumer advisory. Just last week,
Mr. Gorfine who was here talked about a recent advisory that we
have put out in this area, LabCFTC has.
I don't want to minimize the concern over retail, but I
also want to say, again, these are relatively small markets. My
belief is that we should proceed smartly, but deliberately, and
things will develop over the next few years. And then it will
be clearer where jurisdiction should go.
Mr. Yoho [presiding.] Thank you. I will now recognize
myself. I am Ted Yoho from Florida. I was over there. I
appreciate you being here, and your patience.
I just want to briefly touch on the Midwest premium. I know
we have talked about that. We have had beer can distributor
companies like Anheuser Busch and Boeing Company and they were
talking about this. What I am hearing from you is do you feel
like it is being monitored enough through the CFTC and watching
the prices of that in the Midwest?
Mr. Giancarlo. I can assure you that within our
jurisdiction over fraud manipulation we are monitoring that
very, very carefully.
Mr. Yoho. Okay.
I admire the job you do. I was just reading here the amount
of volume of equities, global equities, the exchange and the
derivatives, hundreds of trillions of dollars and the whole
global market is $500 trillion. I just don't understand how you
can monitor all that, and then we are going to get into the
area of artificial intelligence and quantum computing. I can
only imagine it is going to go that much faster.
And so one of my questions I have is, again, dealing with
Bitcoins, and I know you were talking about it is a small
player now, but we should prepare for the future. One of those
is, in your capacity in the CFTC, do you have adequate
personnel, technology funding, or is there legislation that we
might could look at for the future that we need to be prepared
for? What are your comments on that?
Mr. Giancarlo. Thank you so much.
As important and as interesting as cryptocurrencies are, in
the scheme of things far more important from an agency agenda
point of view I believe is those other markets that are
measured in the tens of the trillions, not on a notional
value----
Mr. Yoho. Right, and I want that to translate to that
market, too.
Mr. Giancarlo. And I would like to share with this
Committee where I believe this agency needs to go long after I
am gone in the next 10 to 20 years.
Mr. Yoho. That is really what we need to prepare for is 10
to 20 years from now, and we need to do it today to be prepared
for that.
Mr. Giancarlo. Well the CFTC needs to become a data
analytical agency on par with Google and eBay and Facebook.
Mr. Yoho. I agree.
Mr. Giancarlo. Their ability to analyze terabytes of data
and see patterns in it and understand what is going in the
market, we need to have that same capability. We need to go
from an analog-based analysis of data, humans analyzing data,
to automated big data analytical engine, and that is going to
take money. But these markets are big and they are vitally
important to the United States.
Mr. Yoho. It really is. I mean, that is an investment in
our future, and when I heard you say we are 4 years behind,
that just shows more urgency that we need to do that.
I would love to get more information on that and will reach
out to you.
Mr. Giancarlo. Yes.
Mr. Yoho. Let me ask you a question about the end-user
reforms. One particular type of end-user discussed at length in
your white paper is a financial end-user. I have a few
questions about that versus the regular end-user. Where did the
concept of financial end-user come from, and I don't see that
anywhere in the statute?
Mr. Giancarlo. Yes, it really came from our own regulatory
approach following the statute.
Mr. Yoho. Can you describe why they are distinct from other
end-users under the law, but why they might be similar to other
end-users in practice?
Mr. Giancarlo. Yes, the CFTC, with respect, was concerned
about the end-user exception and how far it should go in the
area of non-cleared swaps. But at the end of the day, it gave a
greater allowance for commercial end-users than it did for
financial end-users. Financial end-users don't have the same
degree of excepting out of the uncleared margin rules as do
commercial end-users, and that is really where the distinction
was. And in our white paper with Professor Tuckman, what we
talked about was whether small financial end-users shouldn't
enjoy that, don't they have the same characteristics of small
commercial end-users? That is, that they are not systemic
risks. They may be local risks but they are not broad-based
national economy risks, which was the same basis on which
commercial end-users were excepted. Shouldn't small community
banks enjoy that same exception from non-cleared margin as do
commercial end-users?
Mr. Yoho. Okay, and then just to follow up on that, what
are the unique challenges that financial end-users face under
the clearing and non-cleared margin regimen?
Mr. Giancarlo. Take a small insurance company or a small
pension fund, they invest for the long-term and they might have
short-term payouts. But what they don't have is a lot of cash
laying around to put in the form of margin. They need to use
their cash to invest in long-term so they can maximize their
payout to their pension holders or their insurance holders. And
so by causing them to use cash to pay a margin, that is less
long-term investments they can make. And if they are not a
systemic risk, then shouldn't the same logic that applies to
commercial end-users apply to small financial end-users?
Mr. Yoho. Thank you for your answers.
Next the chair will recognize Mr. Al Lawson from Florida.
Mr. Lawson. Thank you, Mr. Chairman, and welcome to the
Committee.
My questions center around the gas prices rising again, can
we guarantee that the market is operating without manipulation?
Where is the CFTC on creating a rule on position limits?
Mr. Giancarlo. We are making good progress on that. As you
know, a proposal was put out in the final months of Chairman
Massad's term, a proposal that I voted for, and yet in my
travels around the country meeting with ag producers,
manufacturers, and folks in the energy industry, it was felt
that, whether it be the bona fide hedge exception, or the list
of enumerated exemptions, were too narrowly crafted. Hedging
practices that were done for generations on a family farm were
precluded under the definition of bona fide hedge or were not
listed in enumerated hedge exemptions. And so what we are
looking to do is put forward a position limits proposal, and I
hope to do it by the end of this year, if not very early in the
New Year, that will be a solid proposal and will be one that
reflects the concerns of America's agricultural interests.
I am committed to it. I have made a commitment to both this
Committee and my Senate oversight committee that we will move
forward. We are moving forward with drafting a position limits
proposal, and I will put that forward while I am Chairman of
the Commission.
Mr. Lawson. Okay, thank you, and when I leave this
Committee I will be going to another Committee that is always
concerned about technology and cyberattacks. And how can we
protect the automated trading market from cyberattacks and
technological failures, and is there a role for the CFTC to
provide technical assistance to automated trading companies?
Mr. Giancarlo. Thank you for that. If I could just take a
moment on cyber because it is so important.
When I think about cyber, I think about it both within the
agency and then within the marketplace that we regulate,
including those automated trading firms. Within the agency, we
have really honed in on this in two ways.
First, we have to minimize the amount of self-penetration
that is caused by phishing attacks that our employees
unwittingly will open up emails that are often the biggest
cause of vulnerability. And so we have taken proactive steps.
We now do our own self assessments of that routinely, and I
can't tell you how proud I am of our agency personnel. The
percentage of employees that open up those things is dropping
dramatically and we have more work to do, but we are getting
there.
Second, we are now doing, we have just done our third, our
own cyber exercise where we do a full agency-wide drill on an
attack and we just did one in conjunction with one of our
largest registrants, the CME, but also with representatives
from the Federal Reserve and the Treasury present at that
exercise. That is our internal focus.
Our external focus is our marketplace, the companies we
oversee, and here is an area where in our budget we are seeking
additional cyber examiners. We have places for four cyber
examiners. We are down to one right now. It is very hard to
keep these people at a government salary. They are in such
demand in the marketplace. We have to fill those slots. We have
to be doing effective cyber examinations of market
participants, just as you identify, to make sure they are up to
snuff when it comes to cyber resiliency.
Mr. Lawson. Okay, thank you. I have a little bit of time,
and I want to go back to something you said for a few minutes,
if I may, and it dealt with the Midwest premium.
Mr. Giancarlo. Yes.
Mr. Lawson. I have manufacturers that employ people with
Anheuser Busch, and the tariff really affects them, this penny
per can, and in the area of Jacksonville and metal containers.
Could you comment on that a little bit more?
Mr. Giancarlo. Yes, we are very sensitive to that subject.
I know that the cost of aluminum affects consumers in your
district and every district in America, which is why I
personally met with the aluminum consumers group,
representatives from Miller, Coors, and others to hear their
concerns. I have met with our surveillance team to ask them
what they are seeing in the market and to make sure they are on
the lookout for any fraud manipulation, which is what our
jurisdictional duties are in the markets. And I can assure you
we will keep a close watch on these markets as we go forward to
make sure they are free of fraud manipulation.
Mr. Lawson. Thank you. Mr. Chairman, I yield back.
The Chairman [presiding.] The gentleman yields back. Thank
you, sir.
Mr. Arrington, 5 minutes.
Mr. Arrington. Thank you, Mr. Chairman. It was already on.
Chairman Giancarlo, thanks for your service. As a guy that
spent 4 years at the FDIC as Chief of Staff, I can appreciate
the job you have, the challenges you face, the importance of
your job and getting it right and addressing the risks,
managing the risks for a safe and sound commodity futures
market.
I apologize for not being here earlier, I hate to make you
repeat yourself, but I have one specific question and then sort
of a broad set of questions, so let me jump into the specific.
And I know there has been lots of discussion around aluminum
and downstream users of aluminum. As you said, we all have
those in our districts.
But somebody presented a question I thought was a good
question, so I am just going to propose it to you. But those
downstream users, or some of them continue to see situations
where the Midwest premium for aluminum seems to reflect price
spikes that are based on offers to sell rather than actual
closed trades in the market. Are there other commodity markets
that operate in that way on offers to sell, and could you
explain that?
Mr. Giancarlo. Yes, sure. What they are referring to is the
way that Platts formulates their index. In fact, I had this
very conversation with the users group. Their objection is the
way that index is formed. Now the U.S. approach to benchmarks
is to not dictate how index providers do their calculation,
provided it is free of fraud and manipulation, and provided
they are clear as to what their methodology is. Other
jurisdictions, the Europeans for example, their approach is to
dictate every element of what goes into a benchmark.
I was thinking about this just the other night. Years ago I
took the British driving test. I had my U.S. license for 20
years and I considered myself a good driver, and after two
lessons, the instructor said to me, ``You are going to fail the
test.'' I said, ``What have I done wrong? I haven't hit a
cone,'' he said, ``No, but you are not driving in the
prescribed manner. There is a British manner of driving and you
are not doing it.'' And it is a different mindset. We in
America don't tell benchmark providers how they must do it. We
just say, ``You have to tell your consumers how you are doing
it and if they want to use your service, they will. If they
don't, they don't.'' Europe purports to tell benchmark
providers how to construct their benchmark, and even if it is a
perfectly accurate benchmark, if it is not constructed the
right way, I am sorry for this long detour, but what I am
concerned here is what we are hearing is not that this
benchmark might be manipulated, but it is not being built in a
way that satisfies those who consume it. And that is not within
our jurisdiction.
Now if Congress wants to dictate how benchmarks are
constructed, that is for Congress. But that is not something we
have the legal authority to dictate how the benchmark is put
together, provided that it is free from fraud and manipulation.
Mr. Arrington. Yes, what was expressed to me, at least, is
if you have just offers to sell as one of those metrics, or the
main metric that it could artificially inflate the price.
But let me go to a broader high level question, because
this is important for me. If you have already said it, again I
apologize.
We used to get this question. What keeps you up at night?
What are the two or three big risks that you are focused on
that we should be focused on, and then what do you need that
you don't have to manage those risks from Congress?
Mr. Giancarlo. We just did a full blown cyber exercise in
Chicago, as I said, working with the Treasury, the Federal
Reserve, and one of our biggest operators, and it was very
successful. I was very proud of the team.
I must say, though, that night I laid in bed and I
literally did stay awake worrying about a major cyberattack on
our markets. Because we worked with one of our most responsible
operators in Chicago Mercantile Exchange, they had their act
together. And I sat there and thought about all the lesser
market participants that don't have nearly the same resources,
don't have their act together, and if a bad actor tried to take
advantage of it, the harm it would cause. Cyber is absolutely
my biggest immediate fear.
I have expressed some concern with a hard Brexit. We are
still 8 months away, but as we get closer and closer with no
resolution, I do worry about the impact that that can have on
the global economy.
And then finally more broadly, as I said earlier, we do
need to transform the CFTC, and many regulatory agencies, from
analog-based regulators to really digital-based automated. We
are dealing with massive amounts of market data, and the
challenge is are we seeing the telltale signs of what that data
is telling us in time to be able to do something with it?
The Chairman. The gentleman's time has expired.
Mr. LaMalfa, 5 minutes.
Mr. LaMalfa. Thank you, Mr. Chairman. I am by myself in a
similar situation as Mr. Arrington, having just arrived here
recently so I apologize if any of this is duplicative. I hope
it goes in another direction, so thank you, Mr. Giancarlo.
A couple things I will touch on here. A week ago we had a
hearing about cryptocurrencies and digital assets, and we are
all perfect experts on that now with Bitcoin and everything,
but the possibility of regulating them as securities or
commodities came up on that, so I just wonder what your
thoughts are on that with doing that and with the SEC, are
there any duplicative efforts with other agencies that would be
harmful to that? What are your thoughts on having that be as
regulated as a security or commodity?
Mr. Giancarlo. I want to actually give you some assurance
on one account, and that is that the coordination between
ourselves, the SEC, and the Treasury on crypto-assets and
cryptocurrencies is remarkably good, and remarkably active. I
would say at the CFTC, and we have a working group between
ourselves and the SEC, and they speak weekly on everything from
enforcement actions in cryptocurrency space all the way through
to jurisdictional issues. Then the Treasury under Treasury
Secretary Mnuchin has set up a working group that now has six
different work streams and a group of agency regulators
involved in that. There is a lot of coordination going on,
there is a lot of thoughtfulness going on.
At the same time, we are working with a statute, in the
case of the CFTC, that was written in 1935 and in the case of
the SEC was written in 1933 and 1934. There was no such thing
as cryptocurrencies or even digital assets back then, and so we
have to look at these statutes and find the core meanings in
them and apply them to something that is implied. But that is
what we should be doing.
Mr. LaMalfa. Similar to the Second Amendment that we were
using muskets back when that was written, so those are
arguments you hear.
Mr. Giancarlo. Exactly, but you can discern within it what
was the core purpose, and that is what we seek to do. And I
think responsible regulators should need to do that.
There are some people out in the Twitter space that would
make it look like there is some great deal of confusion, but
there is not. We are working with what we have. We are facing
up to it. We are quite proactive about it. We have strong
working groups. We have been very strong on the consumer
education side. We have been effective on the enforcement side.
The SEC put out a very, I thought, forward looking statement by
Mr. Himan out in San Francisco a few weeks ago about an asset
class called Ether. We have been outspoken, we are moving at a
pace that is reasonable for what is still a very small asset
class, one that is developing rapidly, but still a very small
asset class.
Mr. LaMalfa. Do you think you are keeping pace with its use
and people's comfort with it?
Mr. Giancarlo. I think we are. We are facing up to this
challenge. It is complicated, and these asset classes are
themselves morphing and changing rapidly, and we need to keep
pace. But, we are where we should be at this point in time, and
we are on it.
Mr. LaMalfa. Okay. Let me jump to another thing. Thank you,
Chairman Giancarlo.
We have done a lot of work and listened to a lot of
testimony on swaps while I have been on this Committee the last
few years here, and so referring to your white paper on Swaps
2.0. We have a difference between non-cleared swaps and those
that are cleared transactions, and that much more margin needs
to be put in place for those non-cleared swaps. And so with the
need for financial regulation on taking care of the risk,
changing the framework for doing so would require a great level
of concurrence with many other financial regulators. In order
to change the emphasis from the non-cleared margins.
Mr. Giancarlo. Yes.
Mr. LaMalfa. Okay, and so that will be pretty difficult.
What would you see as the better framework for having the non-
cleared requirements be simplified or streamlined and still not
upset the balance with all the other regulatory interests
involved?
Mr. Giancarlo. Yes, it is very challenging. If you look
about the whole swaps reform effort, as I do, like the first
version of a piece of software, in the first version of any
software there is what they call hard plugs. They are simply
things they put in to hold the place and they would get to it
later. In the area of uncleared swaps, there is a very rigid
hard plug that says on all margin uncleared swaps, you use a 10
day margin requirement. You assume that the swap would take 10
days to liquidate. Well that is a very broad assumption that
actually is kind out of thin air, because some swaps----
Mr. LaMalfa. Let me jump in. We have a 4 year experience
with current CFTC framework, regulatory framework on that, so
are we still at that infant stage on non-cleared, or are we----
Mr. Giancarlo. Well, we are at a stage right now we can
replace some of those hard plugs with real live calculations,
but exactly as you say, the challenge now is you have
regulators here and regulators abroad that we need to harmonize
with. It is a difficult one, and which is why I find white
papers so important to be able to get the point across, win the
battle of ideas that make it then easier to then do the
legislative and the regulatory processes necessary to----
Mr. LaMalfa. Do you feel comfortable that we have that
framework in order to move that direction already vetted or out
there on the table?
Mr. Giancarlo. Well at the global bodies there are bodies
like the Financial Stability Board and IOSCO which provide a
forum for this. Here in the states, we have our own FSOC, and
then bilateral dialogue that I engage in regularly with my
fellow regulators.
Mr. LaMalfa. Okay. I am over time. I thank you for your
indulgence, Mr. Chairman. I yield back.
The Chairman. The gentleman's time has expired. Thank you.
Chris, let me ask you one more question while we still have
you.
In your white paper, you talk about a number of
clearinghouse-related issues and last year in the wake of our
hearing on clearinghouses, we talked to you at length about
systemic risk and liquidity facing clearinghouses.
One of those issues that received a little bit less
attention is the role of a regulator in either facilitating the
recovery or the resolution of a troubled clearinghouse. What
should be the role of government when a clearinghouse has
failed or is on the verge of failing to be able to make good on
settlement obligations? Two related questions are why should a
regulator step in, and probably the more difficult is when?
Mr. Giancarlo. Yes.
The Chairman. If you could walk us through some of that?
Mr. Giancarlo. Yes. Clearinghouses are unique animals. They
are not banks, and at the time of Dodd-Frank the notion of
resolving a too-big-to-fail bank was thought that maybe some of
the same approach might apply to a clearinghouse. But
unfortunately, it is really the wrong approach.
Clearinghouses, as I say, are not banks. They don't have a
bank-like balance sheet. They don't have long-term investments
and short-term funding needs. They are matchbooks. Their
balance sheet is relatively minimal, their own balance sheet.
But what they do have is collateral that in a short-term
liquidity crisis they might need to convert to cash. They might
have a short-term overnight or daylight need for collateral
conversion assistance that can be provided by the government.
But the big difference is the goal of a clearinghouse is to
keep it going, not to wind it down. Prior to Dodd-Frank, the
approach for a failing clearinghouse was to put it into Chapter
7 and wind it down. That is the wrong approach because you have
tens of billions, maybe trillions in some cases, of bilateral
exposures in that clearinghouse. You need to resolve that over
the course of those contracts. And so the goal has to be to
keep it alive.
I have taken a long route to ultimately get comfortable
with the approach that is in Dodd-Frank of working with the
FDIC in the event that a clearinghouse does need to be
resolved, but I spent a lot of time with the FDIC with former
Chairman Gruenberg and with Chair McWilliams to help them
understand the unique nature of what clearinghouses are and how
they need to be kept going, not wound down, to support orderly
market activity, which would be vital for the recovery of an
economy after a financial crisis.
The Chairman. Is that, probably I assume, but is that
tailored as to why the clearinghouse got in trouble in terms of
the reasons for the need to step in or have the regulators step
in?
Mr. Giancarlo. If you look historically over hundreds of
years, you rarely see clearinghouses fail. If they are properly
managed, the likelihood, again, it is not like a bank. A bank
may invest in real estate long-term and have a short-term
liquidity crisis and then can't convert that long-term
investment into short-term cash. Clearinghouses don't work that
way. They are operating a matchbook for every obligation. They
have a collateralized counter obligation, and so provided they
are managing their matchbook, they shouldn't have a failure
that brings them down. If one of the counterparties fails, they
have not only the collateral on hand to satisfy the other side,
but they have all kinds of mechanisms they do, including they
can wipe out those obligations. Their survival capability,
under law and regulation, is pretty extraordinary. They are
like one of these characters in a movie. It is hard to kill
them, and the risk usually is short-term, that ability to just
convert treasuries into dollars is not that hard, but that is
the area and I think that we need to take a different approach
to their resolution than we do as with a bank. We need to plan
for it, absolutely, but if we do our job and if they do their
job as well managed, the likelihood of a clearinghouse going
under is a very remote possibility. One we need to prepare for,
absolutely, but it is not like a bank failure.
The Chairman. Right.
Mr. LaMalfa, anything else? Did you want another round?
Mr. LaMalfa. No, thank you.
The Chairman. All right. Well, Chris, thank you very much.
Once again you demonstrated breadth of command of all the
issues facing your agency, forward looking as well as just the
day in and day out that gives me additional great comfort that
we have the right guy at the agency.
As I said in my opening statement, I have changed my
position with respect to reauthorization. I am still keenly
interested and driven to get your agency reauthorized, because
it is the right thing to do, but also recognize that punishing
you and your hardworking colleagues with a shortage of assets
while I try to leverage that against inaction in the Senate it
hasn't worked, and when something doesn't work, you move in a
different position. And so I will be working with you and Mr.
Aderholt on trying to address issues facing your agency from a
physical standpoint.
Mr. Giancarlo. I am most grateful for that, Mr. Chairman. I
can assure you that every dollar that Congress decides to
appropriate to us we will put to the best use.
The Chairman. And I have confidence in your management
skills.
So with that, under the Rules of the Committee, today's
hearing will remain open for 10 calendar days to receive
additional materials, supplementary written responses from the
witness to any question posed by a Member.
With that, this hearing of the Committee on Agriculture is
adjourned. Thanks, Chris.
[Whereupon, at 11:45 a.m., the Committee was adjourned.]
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