[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]







    EXAMINING THE UPCOMING AGENDA FOR THE COMMODITY FUTURES TRADING 
                               COMMISSION

=======================================================================

                                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











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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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \4\ CFTC Staff Issues Advisory for Virtual Currency Products (May 
21, 2018), https://www.cftc.gov/PressRoom/PressReleases/7731-18.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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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