[Senate Hearing 115-691]
[From the U.S. Government Publishing Office]
S. Hrg. 115-691
STATE OF THE CFTC:
EXAMINING PENDING RULES,
CRYPTOCURRENCY REGULATION,
AND CROSS-BORDER AGREEMENTS
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HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 15, 2018
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
36-550 PDF WASHINGTON : 2019
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
PAT ROBERTS, Kansas, Chairman
THAD COCHRAN, Mississippi DEBBIE STABENOW, Michigan
MITCH McCONNELL, Kentucky PATRICK J. LEAHY, Vermont
JOHN BOOZMAN, Arkansas SHERROD BROWN, Ohio
JOHN HOEVEN, North Dakota AMY KLOBUCHAR, Minnesota
JONI ERNST, Iowa MICHAEL BENNET, Colorado
CHARLES GRASSLEY, Iowa KIRSTEN GILLIBRAND, New York
JOHN THUNE, South Dakota JOE DONNELLY, Indiana
STEVE DAINES, Montana HEIDI HEITKAMP, North Dakota
DAVID PERDUE, Georgia ROBERT P. CASEY, Jr., Pennsylvania
DEB FISCHER, Nebraska TINA SMITH, Minnesota
James A. Glueck, Jr., Majority Staff Director
DaNita M. Murray, Majority Chief Counsel
Jessica L. Williams, Chief Clerk
Joseph A. Shultz, Minority Staff Director
Mary Beth Schultz, Minority Chief Counsel
C O N T E N T S
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Thursday, February 15, 2018
Page
Hearing(s):
State of the CFTC: Examining Pending Rules, Cryptocurrency
Regulation, and Cross-Border Agreements........................ 1
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STATEMENTS PRESENTED BY SENATORS
Roberts, Hon. Pat, U.S. Senator from the State of Kansas,
Chairman, Committee on Agriculture, Nutrition, and Forestry.... 1
Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan... 3
WITNESS
Giancarlo, Hon. J. Christopher, Chairman, Commodity Futures
Trading Commission, Washington, D.C............................ 5
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APPENDIX
Prepared Statements:
Giancarlo, J. Christopher.................................... 26
Document(s) Submitted for the Record:
Roberts, Hon. Pat:
CFTC and European Clearing House Oversight Letter............ 54
Question and Answer:
Giancarlo, J. Christopher:
Written response to questions from Hon. Pat Roberts.......... 58
Written response to questions from Hon. Debbie Stabenow...... 65
Written response to questions from Hon. Thad Cochran......... 70
Written response to questions from Hon. Michael Bennet....... 71
Written response to questions from Hon. Robert P. Casey, Jr.. 78
STATE OF THE CFTC:
EXAMINING PENDING RULES,
CRYPTOCURRENCY REGULATION,
AND CROSS-BORDER AGREEMENTS
----------
Thursday, February 15, 2018
United States Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m., in
room 328A, Russell Senate Office Building, Hon. Pat Roberts,
Chairman of the Committee, presiding.
Present or submitting a statement: Senators Roberts,
Boozman, Ernst, Grassley, Thune, Daines, Fischer, Stabenow,
Brown, Klobuchar, Bennet, Donnelly, Heitkamp, and Smith.
Chairman Roberts. Before I call the hearing--well, I will
do that officially--I call to order this hearing of the Senate
Agriculture, Nutrition, and Forestry Committee--but first I
want to welcome Senator Grassley, who is always in the pursuit
of justice.
Senator Grassley. I hope what you are offering me is a
point of personal privilege to go ahead of everybody else,
including the Chairman, so I can get to----
Chairman Roberts. I think when you----
Senator Grassley [continuing]. so I can get to the
Judiciary Committee to have an important meeting----
Chairman Roberts [continuing]. when you threaten the
Ranking Member and myself that you were going to investigate me
and put us under oath, I thought I would recognize you.
[Laughter.]
Senator Grassley. Okay. Thank you very much.
For the benefit of why he is letting me do this, is because
I have to go to the Judiciary Committee to chair, and then we
also have immigration on the floor that I am managing, so I
appreciate this because I cannot be at this hearing.
So this is a question I am going to want all the members to
know I am asking, and Chairman Giancarlo to know that I am
asking it. Then when his--he gets a turn to respond to this,
then he can respond to it so every member of this Committee can
hear it, but I also hope he will back it up and answer it in
writing for me.
The purpose of this is to have the CFTC, which has been
working with the EPA and overseeing the RINs market, the two
agencies signed a memorandum of understanding March 2014, so
that predates the Chairman of the CFTC's involvement in it. So
he does not have any involvement in it but he has obviously got
some responsibilities now.
So, to Chairman Giancarlo, my question. In March 2016, a
memorandum of understanding was signed between EPA and CFTC
regarding the market for RINs. RIN stands for renewable
identification number and is a mechanism that we use to enforce
the renewable fuel standard. The memorandum States, quote,
``CFTC review and analysis of the information will assist the
EPA in protecting the public and providing advice to EPA on
conducting possible investigations into potential fraud, market
abuse, and other violations relating to the generation of
trading in RINs.''
So my specific question for you to answer later is, how
have the CFTC and EPA worked together since signing the
memorandum of understanding nearly 2 years ago? Has the CFTC
ever analyzed RIN data with the intent of identifying the
impact of speculators have on the markets? This issue of
speculations on the markets has come up very recently, as
several Senators have had disputes over what ought to happen to
RINs.
So I thank you for that consideration, and, more
importantly, I thank the Chairman and Ranking Member for the
courtesy that they just gave me. Thank you very much, Chairman
Giancarlo.
Chairman Roberts. We thank you, Senator Grassley. That will
be submitted for the record and I know Chairman Giancarlo will
respond in due haste, and thank you, sir.
STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
Chairman Roberts. I welcome my colleagues, especially the
newest additions to the Senate Agriculture Committee, Senator
Fischer from Nebraska, Senator Smith from Minnesota. For the
benefit of the members I would like to note that Ranking Member
Stabenow and I are both pleased to announce that Senator
Fischer will be chairing the Subcommittee on Livestock,
Marketing, and Agriculture security. Senator Smith is the
Ranking Member for the Subcommittee on Rural Development and
Energy. We welcome you to the Ag Committee. Thank you.
[Applause.]
Chairman Roberts. I welcome today's witness, Chairman of
the Commodity Futures Trading Commission, Chris Giancarlo, as
we examine a number of issues with him--the derivative market
space, including key end user rules currently pending before
the Committee; the status of cross-border equivalency
agreements; and determining the proper role of regulators
involving the market of crypto-currencies.
Mr. Chairman, I speak for the whole Committee when I say we
have been very impressed with your leadership heading up the
CFTC since January of last year. While we held a number of
confirmation hearings last year for you and your fellow
commissioners, it has been almost 3 years since this Committee
has held a true oversight hearing examining the CFTC and the
markets that you regulate. This hearing is very timely, given
that a lot has happened since that time.
This is especially true in the derivatives sector, where
commodities like Bitcoin and other crypto-currencies have
become a major topic of discussion, not only among large
financial institutions on Wall Street but among retail
purchasers who are trying to determine what role, if any,
crypto-currency should play in their investment decisions.
Because crypto-currency offerings, and the technologies
they are built upon, are skyrocketing, regulators like the CFTC
are working hard to provide consumer protection, but without
stifling further innovations in the market. Furthermore, the
technology underlying crypto-currency has transformative
potential. Blockchain, or distributed ledger technology, may
offer the economy significant benefits as it is used to create
more secure, transparent, and efficient ways for recordkeeping.
I am pleased to see the CFTC taking such an aggressive and
active role in this space.
There was the historic vote by the people of Great Britain
to leave the European Union. We are now seeing how the
decisions of European officials regarding cross-border
financial regulations may upend carefully negotiated agreements
that would otherwise provide regulatory certainty to financial
stakeholders operating on an international stage.
We also continue to hear from important derivative end
users in the agriculture sector and beyond, eagerly awaiting
resolution to important rulemakings mandated under the Dodd-
Frank Act. We understand you and CFTC staff are working
diligently on a number of these issues and we look forward to
hearing with regard to your progress.
To that end, Mr. Chairman, I understand without an
additional commissioner finalizing some of these important
rules is made much more difficult. I think both the Ranking
Member and myself would like to see Dawn Stump, who was
reported out of the committee last year, confirmed as soon as
possible. The hold of her pending nomination is unacceptable
and we will move forward on consideration of the additional
vacant commissioner spot as soon as an individual is nominated.
We need to move forward and get a fully functioning commission.
Whether it is market participants who rely on CFTC to
provide regulatory certainty or consumer financial advocates
who highlight the need for robust oversight of the market, I
think everyone can agree we need a full panel of commissioners
at the CFTC.
Again, thank you, Mr. Chairman, for being here today. I
look forward to your testimony. I now turn to my colleague,
Senator Stabenow, for her opening remarks.
STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
OF MICHIGAN
Senator Stabenow. Well, thank you very much, Mr. Chairman,
and welcome, again, Chairman Giancarlo. It has been good to
work with you and I appreciate you being before the Committee.
I also want to join the Chairman in welcoming our new
members, Senator Smith and Senator Fischer. We are very, very
pleased to have you on the Committee, particularly at this
important time when we are coming into our major responsibility
as a Committee in writing the 5-year farm bill. So thank you so
much.
Many people do not realize the importance of futures and
swaps markets to the strength and stability of our economy. I
know this Committee does. When a corn or soybean farmer in
Saginaw County, Michigan needs protection from damaging swings
in commodity market prices, they use the futures markets. When
an auto manufacturer in Detroit needs protection against
changes in foreign currency in order to export American-made
products, they use swaps. Futures and swaps markets support our
economy, helping to create American jobs and promote economic
stability. We need a strong CFTC to ensure that those markets
are fair and transparent and free of fraud and abusive
practices.
It has been roughly 10 years since the Great Recession,
when the reckless actions of a few led to the pain and
suffering of many. Over 8 million jobs were lost. Countless
small businesses were shuttered. Farmers and businesses across
the country faced foreclosure. Many older Americans were forced
to delay their hard-earned retirements, while many younger
Americans were unemployed and unable to pursue their piece of
the American dream.
We must never allow the devastation of the Great Recession
to be repeated. It is critical that we do all we can to ensure
that farmers and businesses and families are protected from
financial ruin through no fault of their own.
Congress has entrusted the CFTC with tremendous
responsibilities--protecting customers, promoting transparency
and stability in our markets, monitoring for market abuses and
systemic risk, and holding wrongdoers accountable, just to name
a few. Since the passage of Dodd-Frank, the CFTC has worked
hard to promote strong customer protections. The agency has
modernized its surveillance capabilities to better identify
market abuses and systemic risks. Its enforcement program has
exposed wrongdoing by some of the world's largest financial
institutions, while also targeting the crooks and fraudsters
who push Ponzi schemes and investment scams in our communities.
As I have said before, there is more work to be done. We
must continue to make progress toward a safer financial system,
which is why I am concerned that the agency has not yet
completed the rulemaking required by Dodd-Frank. Critical rules
such as implementing speculative position limits and setting
minimum capital requirements for swap dealers remain
nonexistent.
I am also interested to learn more about emerging market
issues such as the CFTC's approach to automated trading and the
tremendous growth of the crypto-currencies like bitcoin.
Finally, we must continue to advocate for the CFTC to have
the resources it needs so that it can really do its job. The
CFTC's responsibilities have increased dramatically since the
Great Recession, without the necessary funding to fully carry
out those responsibilities, and, as a result, Americans have
been placed at risk, and that is not acceptable.
Chairman Giancarlo, I know you share this concern. I am
committed to advocating for a fully funded CFTC and I urge my
colleagues to join me in supporting this critical need. Our
nation's farmers, ranchers, Main Street businesses, and
consumers all depend on fair and transparent derivatives
markets, and they need the security and protection provided by
strong CFTC oversight.
Today I look forward to hearing more about how the CFTC
will continue to strengthen its efforts to safeguard our
markets, minimize systemic risk, and protect consumers from
fraud and abusive practices.
Thank you, Mr. Chairman.
Chairman Roberts. I thank the Ranking Member for her
comments and I will turn to our witness for today's hearing,
Chairman of the Commodity Futures Trading Commission, The
Honorable J. Christopher Giancarlo. Welcome back, Mr. Chairman.
You are a familiar face to the Committee, and in the
interest of time I am going to skip the lengthy introduction.
The value of your extensive prior experience in the private
sector and your time as Chairman and as a CFTC Commissioner has
been revealed in the way you have been leading the agency.
Since taking the helm, you have done a great job advancing your
vision of making CFTC a 21st century regulator. We look forward
to hearing about the work you have done and your future plans.
Just for the record, what was the level of funding that you
requested, that you think you need to do a good job?
Mr. Giancarlo. $281.5 million.
Chairman Roberts. Then what was the result with regard to
the President's budget?
Mr. Giancarlo. The President's budget has put that number
for $281.5.
Chairman Roberts. $281----
Mr. Giancarlo [continuing]. point 5.
Chairman Roberts. Yes. But not all of it is in funding.
There are what we call user fees. Is that correct?
Mr. Giancarlo. That is correct.
Chairman Roberts. What is that number?
Mr. Giancarlo. $31.5 million.
Chairman Roberts. $31.5 million, which will be a tax on the
farmers and ranchers who use your capabilities and your trust
as they try to manage risk. I am not happy with that. I think
the Ranking Member joins me. I am not trying to put you on the
spot. I just want to let you know that we will consider our
budget according to our baseline, hopefully commensurate with
your needs. Please proceed.
STATEMENT OF THE HONORABLE J. CHRISTOPHER GIANCARLO, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, D.C.
Mr. Giancarlo. Thank you, Chairman Roberts, Ranking Member
Stabenow, and distinguished members, and new members of the
Committee.
When I appeared before this Committee last summer I stated
my priorities for the CFTC--to foster open, competitive, and
transparent markets, free from fraud and manipulation, in
support of broad-based economic growth that respects the
American taxpayer through careful management of agency
resources. I pledged that, if confirmed, I would work with each
of you in our common purpose of serving the American people and
the agricultural producers on which we all rely.
Thank you for this chance to report on our progress. I look
forward to your questions on the CFTC's enforcement program,
recent budget requests, swap dealer de minimis, position
limits, swap data reporting, Project KISS, our upcoming ag
futures economics conference, and other matters. I also look
forward to discussing the complex challenges of virtual
currencies, including the CFTC's response and increased staff
competency, consumer education, interagency cooperation, our
exercise of authority, aggressive enforcement, and heightened
review of virtual currency futures.
With your permission, I would like to use the next few
minutes to talk about American agriculture. The U.S. Census
Bureau estimates that there will be another 2 billion people on
Earth in the next 20 years. This poses a massive challenge for
the global economy and governments and societies worldwide. How
will all these people be fed? How can we meet these challenges?
American agriculture.
Just as the U.S. has emerged as a self-sufficient producer
of energy for global markets, thanks to American ingenuity and
entrepreneurship, the U.S. will play a big part in feeding the
globe in the decades to come, thanks to the hard work and
intelligence of the American farmer and rancher. American
agriculture and energy producers will respond to the rising
global demand with the support of U.S. derivative markets
regulated by the CFTC and overseen by this Committee.
Our futures and swaps markets serve at least two critical
roles in feeding and powering the world's growing population.
First, they allow markets to resolve imbalances efficiently, by
providing reliable price benchmarks set in U.S. dollars.
Second, they reduce price volatility of the world's limited
resources by removing the economic incentive to hoard physical
supplies. They allow America's farmers, ranchers, and energy
producers to measure and transfer the risks of production to
those willing and able to take that risk, stabilizing earnings,
and benefiting all parties, including consumers worldwide who
otherwise do not participate in derivative markets.
For these reasons, American agriculture and American
commodity futures markets are vital national interests. CFTC-
regulated markets are among the world's most robust and the
most resilient. Even with extreme volatility, as we saw
recently, CFTC-regulated markets were able to successfully take
on and manage risk, enabling valuable risk transfer to support
and stabilize the broader financial market. That is why I am
grateful to you, Chairman Roberts, and Ranking Member Stabenow,
for your recent letter supporting the CFTC's approach to the
cross-border supervision of major clearinghouses and our
current discussions with regulatory counterparts in the
European Union.
As you know, in 2016, my predecessor, Tim Massad,
painstakingly negotiated an agreement with the EU for how we
supervise each other's clearinghouses. That agreement, which I
supported as a minority commissioner, is built upon the
principle of regulatory deference. We believe that deference
supports strong cross-border markets, recognizes our
commonalities, and builds upon the strengths of our respective
jurisdictions.
The agreement aligns with the mutual pledges of the United
States and Europe in the G20 accords to cooperate and avoid
market fragmentation, regulatory arbitrage, and protectionism.
That is why we continue to seek assurances from the EU that
U.S. clearinghouses will not be treated differently than they
are now. American markets must continue to be regulated under
U.S. law, by American regulators, overseeing by this Committee
of Congress.
In closing, with the proper balance of sound policy,
American regulatory oversight, and supervisory deference by our
oversees regulatory counterparts, U.S. community derivative
markets will continue to safely serve the needs of America's
farmers, ranchers, and energy producers, enabling them to feed
and power the world, not just today but in the generations to
come.
Thank you very much. I look forward to your questions.
[The prepared statement of Mr. Giancarlo can be found on
page 26 in the appendix.]
Chairman Roberts. Chairman, thank you very much for a
comprehensive commentary, more especially outlining the
challenge that we face in feeding not only ourselves but a
troubled and hungry world. Show me a country that cannot feed
itself and I will show you chaos, and we have got a lot of
that. It would be helpful if we had an aggressive and robust
trade policy that anybody could figure out. Thank you for your
comments.
Blockchain is mostly discussed in its context as the
technology underlying bitcoin. My understanding is that
potential benefits are substantial for multiple industries,
from agriculture to financial services to health care and so
on. Notably, a few weeks ago, there was news of major
efficiencies shown in the sale of approximately 60,000 tons of
soybeans, using blockchain. As this technology and its
transformative potential continues to emerge, what role, if
any, should regulators play in this beginning stage?
Mr. Giancarlo. Thank you, Senator. Blockchain, we have seen
it expanded dramatically in not only the instance you mentioned
but I know a number of other American agriculture merchants are
now adopting it. We are even seeing the rail transportation
system adopting blockchain techniques.
The potential of this technology is truly transformative.
Now, what it will take to realize it, and how it will be
realized, and how long it will take, those are open questions.
The more I read about it, the more I see that the impacts that
it can have on so many of the traditional systems that we
utilize, whether in finance, whether in logistics, whether in
transportation, are extraordinary.
It presents tremendous challenges for regulators. The
concept behind it is the decentralization of information and
the bypassing of central authorities that, for centuries,
societies used to verify information. If you think about it,
from a regulator's point of view, we, ourselves, rely on
verifiers, whether they be exchanges or whether they be data
repositories, and the traditional mode of regulation is to
license those verifiers to play a role in our regulatory
framework.
So it presents tremendous challenges for us in our
traditional ways of regulating, which brings me to the point,
Chairman, it is so important for us to stay ahead of these
transformations. If we fall behind, we could find a real
disruptive impact on our traditional mode of regulation.
Chairman Roberts. I appreciate that. I am going to get
parochial here. One of the biggest issues in the derivatives
space I hear about from farmers in Kansas, and elsewhere,
concerns the lack of convergence. In the past Kansas City Hard
Red Winter Wheat futures contracts, while time will tell,
support of the change to a variable storage rate looks, at
least, somewhat promising.
What update can you provide on outreach the CFTC has done
with producers and exchanges regarding this issue?
Mr. Giancarlo. We focused very carefully on this issue, in
hard red winter wheat and, actually, a number of other ag
products. Just this week, my staff had meetings with the
exchange and with the National Grain and Feed Association, as
well, to talk about this issue and understand some of the
dimensions of it.
I will tell you that the upcoming contract--I believe it is
the March contract--is one of the most used contracts, and the
information that will come out of that is one we are going to
be looking at very carefully, to determine whether we have got
a broader problem or just an anticipated problem. I can assure
you, Chairman, we are watching this very carefully.
Chairman Roberts. Just for the record, I think we have too
much wheat on the ground and not enough of a demand situation
with regards to our trade policy.
Mr. Chairman, you touch on the issue of cross-border
agreements in the letter that the distinguished Ranking Member
and I sent you in January. I ask unanimous consent this letter
be submitted for the record, without objection.
[The following information can be found on page 54 in the
appendix.]
Chairman Roberts. I understand you will be meeting next
week with a number of your counterparts in Europe. Can you give
us just a preview or a sense of where current discussions are
going on the issue of clearinghouse supervision and other
equivalency agreements entered into between your agency and the
European regulator?
Mr. Giancarlo. Yes. Thank you, Senator, and thank you for
that letter. For our European counterparts to know of the
resolve of this Committee and your support for our position is
extremely helpful.
The message I have been giving to them, and the message I
will be giving them in the next meeting is the same one that I
said in my opening statement, which is that American markets
must continue to be regulated under U.S. law, by American
regulators, overseen by this Committee of Congress. That is the
position I have stated from the beginning and that will be the
position I will maintain throughout the negotiations.
Chairman Roberts. I truly appreciate your comments. Thank
you for your responses. I appreciate your insights on all these
topics. I do have additional questions for you but in the
interest of time I will submit them for the record. I look
forward to your responses.
I now turn to Senator Stabenow for her questions.
Senator Stabenow. Thank you, Mr. Chairman, and again, thank
you, Chairman.
I wanted to follow up. The Chairman was talking about the
letter we had written to you, regarding, of course, bitcoin
futures. I am wondering, as we look at protecting customers and
market participants, what more needs to be done at this point?
Mr. Giancarlo. Senator, it is such a fast-moving area that
I think it is critical that we be learning, watching, and
understanding every step of the way. We had a 4-hour meeting
yesterday of our technology advisory committee at the CFTC, and
we had some of the leading experts in this area in, educating
us.
As you know, we have also started something at the CFTC
called LabCFTC, which is our outreach into these technological
developments, to understand their innovations. The first step
is a thorough understanding of this emerging technology and how
it works.
Senator Stabenow. One of the things you mentioned in your
testimony was the shortcomings in oversight at this point in
time, and that there are gaps in protections for traders and
investors in the markets. So, that is worrisome and I am
wondering how quickly something can happen. These markets are
going to continue to grow and they have to be made safer for
investors and the broader financial system.
So, you know, I appreciate the approach you are taking but
how soon will we see something definitive happening?
Mr. Giancarlo. Well, so, as you know, in our budget request
we do request additional funds for additional examiners, and
that is very important.
I am pleased to tell you, Senator, that since the launch of
the new bitcoin futures product, since its launch there has not
been a single margin breach, even during the heightened
volatility that we saw over the last few weeks. So that product
is operating in a completely lit environment, a transparent
environment.
We are monitoring--unlike bitcoin cash market, which we do
not regulate, we do not have oversight authority over, we have
enforcement authority but not oversight authority--in bitcoin
futures, which we do regulate, and we see all the transactions,
identified. It is not an anonymous market. It is a disclosed
market. It is a thoroughly regulated market. It is a market of
mostly institutional and high net worth. It is not a primarily
retail market, as is the underlying market. So we are confident
that the regulatory systems we have put in place over decades
will serve well in this new futures market.
The underlying market, as I have disclosed in my written
statement, is a--it is not a supervised market, and that is a
policy choice that I think we are all going to have to face in
the months and the years to come.
Senator Stabenow. Mr. Chairman, you have talked about
adequate funding, and it is something I have talked about for a
long time. I am glad to see the movement in the budget. We have
to figure that out. You are talking about oversight--the CFTC's
oversight. Could you talk, in general, about what you have done
to strengthen the CFTC's oversight program? You talk about
needing more staff to do this new piece. How much has this been
a problem, in terms of providing accountability and oversight,
with not having the staff that is needed to be able to do that?
Mr. Giancarlo. Thank you, Senator. I would never let our
oversight capability suffer any deterioration in its
effectiveness. There are other needs that perhaps we might
triage again, perhaps some training, some publications. We long
had a library at the CFTC. I mean, there are areas where we can
move.
When it comes to oversight, we maintain cops on the beat.
One of the structural changes I have made since becoming
Chairman was to move our surveillance branch into our
enforcement branch, so that the lag between detecting
wrongdoing and acting on wrongdoing is immediate and not
delayed by any type of interagency delay.
So I feel that our effectiveness in rooting out fraud and
manipulation is as strong as it has ever been, but we do have
needs elsewhere. You know, we have suffered losses in our
economics unit, our Office of Chief Economist, which we need to
beef up. There are other areas. When it comes to fraud and
manipulation, we are as strong--we are covering the waterfronts
without any gaps.
Senator Stabenow. Thank you. Finally, you have recently
announced Reg Reform 2.0.
Mr. Giancarlo. Yes.
Senator Stabenow. Based on the fact that there are several
critical rulemakings not yet done from Reg Reform 1.0, when
will you complete the unfinished business, and will you commit
to not weakening any of the safeguards that have been built in
since the financial crisis?
Mr. Giancarlo. Yes. If I can take the last question first,
I can pledge to you I do not intend to weaken the safeguards
built in. I am supporter of the core reforms of Title VII of
the Dodd-Frank Act. I always have been and remain today.
The two unfinished rules you mentioned in your opening
remarks, the di minimis and position limits, I said to you,
when I met with this Committee last June, that we would get
both of those done, and in the fall, I said we would get the di
minimis done in the first half of this year. I intend to put
that in front. In fact, meetings are now scheduled with my
fellow commissioners to present them with data through the end
of 2017. So they will have the most up-to-date data, and those
conversations will take place over the next several months.
On position limits, I also pledged to you to move forward
with that. We are moving forward with that. We will have
something to present to the commissioners, I think, by the
beginning of the second half of this year. The staff is working
on it now. Now with position limits, as you know, that is a
complicated rulemaking, but I think we can get this done. I do
think it is something that does require a full commission. I
think that for position limits to be a lasting rulemaking it
should be considered by a commission of five, as intended.
So we will not stop working on something, but I hope that a
final rule can be voted on by five commissioners, not by three.
Senator Stabenow. Thank you. Thank you, Mr. Chairman.
Senator Boozman.
[Presiding.] Thank you, and thank you, Mr. Chairman, for
being here. We do appreciate all of your hard work, and your
insight today as we, really delve into some important issues.
One thing I would like to say, before I get into my
questioning, is that I very much oppose the question of user
fees. I opposed it in 2016. I think that if we go down that
path then we would likely reduce liquidity, have increased
volatility, and less efficient use of our futures markets.
I know that you know the issues of funding, so that you can
do what we ask you to do, is so important. As a member of the
Appropriations Committee, and I think I can speak for the
Appropriations Committee, we are working hard now, as we get
into trying to finish out Fiscal Year 2018, and then also
starting 2019, to try and address that.
We have talked a lot about, in the past, cybersecurity, and
I would like for you to comment on that. It seems like our
agencies now because we can do it, we can gather all of this
information, but as we essentially centralize it, comes the
responsibility of protecting it. Can you tell us what you are
doing in that regard?
Mr. Giancarlo. Absolutely, Senator, and thank you for that
question. I am delighted you asked me this because it is one
that I have been focused on since I have joined the commission.
I spoke--in 2015, I was honored to be asked to go to Harvard
Law School and speak on 21st century challenges, and I said the
No. 1 challenge to America's global financial markets is cyber,
and I remain as convinced of that in 2018 as I was in 2015.
Since becoming Chairman of the agency I have done a number
of things. I now meet, once a month, in a scheduled meeting,
with our chief cyber officer, and at that meeting he presents
me with a full rundown of everything we have seen on the cyber
front over the past month. I cannot disclose all of that to you
but I have previously said that we receive close to 10,000
cyber attempts per month. So to give you an idea of the
relentless threat that we face, and I know a number of the key
institutions that we oversee face even higher numbers, such as
our exchanges and others. So this threat is serious.
I am satisfied, from those meetings, that, as an agency, we
are compliant with the key Federal regulations under FISMA, the
Federal Information Security Modernization Act, the National
Institute of Standards of Technology, NIST standards, and
annual OIG audits.
We have done more than that. One of the things we have
started at the commission, that has never been done before, we
now do full agency-wide cyber drills. A few weeks ago, we just
did our second drill under my chairmanship, full agency-wide,
all four offices, where we did a simulated attack on the
infrastructure that we oversee, to see how we react to that.
Because there is an old adage in the military service, that I
think the Chairman may be familiar with, and that is you fight
as you drill. So I have told the staff, we are going to drill
repeatedly so we will know how to fight when the cyberattack
comes. We are also asking the entities that we regulate to have
similar protocols in place as well.
Now one of the areas that we are asking for additional
funding for is for is in our ability to examine the cyber
readiness of the entities that we oversee, and the exchanges.
We can use more resources to examine their cyber preparedness.
Senator Boozman. Very good. I appreciate you coming out so
strongly to protect the agreements with the EU commission that
we worked in the past. Can you give us an example of what would
happen if those were weakened significantly?
Mr. Giancarlo. Yes. We are very concerned that the EU may
have in mind the ability and the right to do unscheduled,
independent examinations of our clearinghouses, to show up on
their doorstep and to go in and conduct exams, to conduct test
procedures, to require European standards and European practice
on how our clearinghouses operate. I know of no other area
where an overseas regulator can come into a U.S.-regulated
environment and conduct their own independent exam, or even if
they propose to do it in conjunction with us, that is not our
legal structure. We are a sovereign nation. We are an
independent agency. We report to this Committee and a committee
in the House. We do not report to overseas regulators. The
dimensions of what could come out of this proposed European
legislation, I think are quite breathtaking.
Now, what we are told is that we are maybe getting ahead of
ourselves, that we need to wait and see what this all means.
Well, I have never been one to much wait. I think that we need
to make clear to Europe right now that we have been regulating
our clearinghouses for decades. We have gotten it right. None
of them failed during the financial crisis. You know, we can
always improve, but, quite frankly, to be told that we will
have to jointly work with an overseas regulator is something
that is unprecedented.
Senator Boozman. Well, thank you, and again, I think we
have complete agreement on that issue.
Thank you, Mr. Chairman.
Chairman Roberts.
[Presiding.] Senator Smith.
Senator Smith: Thank you very much, Chair Roberts, and
Ranking Member Stabenow.
I would like to just start by telling you how excited I am
to serve on this Committee and represent Minnesota farmers and
also Minnesota forest products organizations with my colleague,
Senator Klobuchar. I am really honored to be the Ranking Member
on the Rural Development and Energy Subcommittee. So I look
forward to working with Senator Ernst on those rural priorities
and to work hard for Minnesota priorities on the farm bill. I
am excited, also, really respect the spirit of bipartisanship
that has been a hallmark of this Committee, and I look forward
to working with all of you. So thanks very much.
Chairman Giancarlo, I wanted to talk with you a little bit
about the swaps market. So, like many Americans, Minnesotans
certainly suffered deep losses as the result of the 2008
financial crisis. Lots, as Senator Stabenow said, lost their
homes, lost their jobs, lost their savings, and one of the
contributing factors, of course, was this largely unregulated
swaps market.
So I think it is so important that we make sure that there
is a strong swaps regulator here. I am sure we share that
value. So can you just discuss with us a little bit about how
the changes that you are working on to existing swaps rules
will not increase the risk of another financial crisis.
Mr. Giancarlo. Thank you for that question, and may I just
simply say that, as Senator Klobuchar knows, I have had some
very good education in Minnesota agriculture over the last few
years. I got to visit the Blue Diamond Dairy Farm, just east of
Sauk Centre, in 2016, and I was in Bloomington, just in
December, with the Minnesota Cattlemen's Association. When you
meet with folks like that, that are really at the grassroots
level of agriculture you understand how important it is that
we, back at the agency, get these rules right, so that they do
not have to experience what they experienced, once again.
You know, I am rather proud, at the CFTC, when I look
around at our fellow derivative market regulators, we are
really the only one--and I say this knowing that our European
colleagues may be listening--we are the only one that has our
full sweep of swaps regulations in place, and the regulations
follow Title VII of Dodd-Frank. This agency embraced its role
to implement those reforms, and those reforms are in place
today, and they are working in place.
Now, that does not mean that every element of them works as
well as it should or as intended, which is why the process of
regulation is not a one-and-done. It is a constant one to
measure, to make sure that they--as markets change, and markets
are very organic in their nature, they evolve and they change,
and we need to make sure that our rules evolve and change to
meet new changes in the marketplace.
Senator Smith. Thank you. So how do you sort of assess, as
you are making these sort of adjustments, tweaking to the
rules, how do you assess kind of what impact that might have on
the, you know, potential for a future financial crisis?
Mr. Giancarlo. Well, we stay in constant contact with the
market. One of the things that we have done since I have become
Chairman is created a new branch within our Division of Market
Oversight called Market Intelligence. The goal of this branch
is to try to understand--there is a great hockey player named
Wayne Gretzky who said he was successful not because he skated
to where the puck was but where the puck was going. The goal of
Market Intelligence Branch is to see where the puck is going,
in terms of market evolution, and to try to make sure that our
rules and regulations stay adequate for those changes in the
market.
Senator Smith. Thank you. As a Minnesotan, I am well
familiar with the Wayne Gretzky analogy, so I appreciate that
very much.
Let me just, in the few minutes--the minute I have left,
touch briefly on this question of budgets and user fees and how
we might--you know, how we make sure that you have the
resources that you need to do the work that you do.
If we do not go to a user fee model on this Committee, and
I understand that that--I understand that there is no decisions
made about that--could you just sort of explain what impact
that might have on your budgets and how you would--you know,
what you would do.
Mr. Giancarlo. Yes. I know that the number we put forward,
$281.5, which is the same number we put last year, is the right
number, and that is because I approached it the way I did in
business of building of budget. I did not take the number from
the prior year and add a percentage to it and say that is our
new budget number.
I said, I want to start from zero. This is my first time as
a chairman. I made every division present to me what their
mission was, what their needs were, what their capabilities
were, and where they were lacking capabilities. We built the
number up from zero--it is called zero-based budgeting--and the
number we need, I know it, is $281.5.
Senator Smith. Thank you, Mr. Chair.
Chairman Roberts. Thank you, Senator Smith. Again, just for
the record, I view user fees as a tax on the farmers, ranchers,
and growers, and all of the people that depend upon you to make
sure that their risk management strategy is protected.
Senator Klobuchar.
Senator Klobuchar. Well, thank you very much, and thank you
very much, Mr. Chairman. We will forgive you, Senator Smith and
I, for using an example of a hockey player that was not from
the Wild or from the old North Stars, but that is okay.
We do want to thank you for visiting our State, both in
Stearns County and then the recent visit with our Cattlemen. We
really appreciate that. One of the things you and I have talked
about in the past is how commercial end users who base their
derivative trades in the actual physical products that they
produce or use is one group, and then you have financial
institutions who base their derivative trades on fluctuations
in prices--and you all know this--or the index, different types
of companies.
Just based on your visits to Minnesota and other places
around the country, how has that helped inform you as you look
at those different types of situations?
Mr. Giancarlo. I am a firm believer that in so many walks
of life that diversity adds value to the marketplace, and I
think that is especially true in financial markets. I think the
broader range of market participants, from big to small, from
what some call naturals, all the way to speculators--not
excessive speculators but speculators--add depth and value to a
market.
When I meet with end users, agricultural and energy
producers, and understand their concerns, I see how critically
important it is that we make sure that they continue to be
comfortable operating in these markets, alongside some of these
commercial, some of these proprietary traders as well. What we
need to do, at the agency, is always try to find--make sure
there is an environment where all can participate. That will
provide us the greatest depth.
Senator Klobuchar. Thank you very much. I know that
Chairman Grassley--oh, no, former Chairman of the Judiciary
Committee Grassley, excuse me--asked you about the issue of RIN
data. As you know, the RFS is critically important, and I have
been working on that for a long time. The CFTC's willingness to
work with the EPA to combat fraud in the creation and sales of
RINs is important as we work to sustain confidence in the
market-based regulatory system.
Based on your experience, do you believe that current
information in trading data in RINs markets would increase
transparency?
Mr. Giancarlo. What I can tell you, Senator, is we were
asked by EPA to look at certain physical market data, which we
did. We do oversee, as a regulator, trading in the RINs futures
contract. Unfortunately, there is virtually no trading in that
contract. I mean, I think one or two trades. That is how little
activity is there, and we monitor that but there is virtually
no activity.
In the underlying market--we are not the regulator of the
underlying market but at the request of EPA we did review data
and we gave them results. Based upon the data, we were not able
to find any misbehavior in the market. The data was both
limited and not of sufficient quality, and we are a data-driven
agency, and analyzing bad data, you do not necessarily get good
results, unfortunately, and we had a conversation about that.
I recently spoke with Ag Secretary Perdue about this
market, and shared these thoughts with him, and we have agreed
that we are going to put our best economists on taking a look
at this, and they are going to be meeting in the next few
weeks. So there are opportunities for engagement here and we
will have that engagement and we will see what comes out of it.
Senator Klobuchar. Okay. Thank you. Last, as you know from
your visit, the livelihood ranchers in Minnesota depends on the
prices that they receive for their cattle, the cost to raise
them. Can you talk about how the CFTC documents transaction
data within cattle markets and cattle future markets, help to
determine what is irregular, what is regular with the
fluctuations, and during the CFTC's collaboration with GAO,
were there any initial findings about the cattle markets that
you can share with our Committee today.
Mr. Giancarlo. So, you know, the cattle contract has been a
concern of mine for some time. It became quite clear, over the
last few years, that there were some convergence issues in that
contract and other problems. We communicated with the CME,
which operates that contract, our concerns, and to their credit
took a number of steps to restructure that contract and improve
that contract.
Now we continue to watch it to see how these improvements
are working--as of last year it looked like they were
addressing a number of concerns of the cattlemen. It was one of
the very subjects I spoke to Minnesota Cattlemen about when I
was up there. How is it working? Are these changes making--
having an impact?
There still may be a number of issues there. What I would
say broadly is one of the things I have learned, as Chairman,
is that it is vitally important for the agency to keep an eye
on how contracts, especially in the ag market, are working, and
to let those that operate the contracts at the exchanges know
that their responsibility is to keep these contracts fresh,
updated. Sometimes contracts are not even updated for a long
period of time, many, many years, and that needs to be done
frequently. These contracts need to be looked at, because they
need to serve our ag users.
Senator Klobuchar. Thank you very much.
Chairman Roberts. Well, Coop, it is 10:17, maybe :16. It is
not high noon yet. Did you get all the critters rounded up? You
are recognized here.
Senator Thune. Terrific. Well, thank you, Mr. Chairman. I
appreciate you and Senator Stabenow having the hearing today
and I want to thank Chairman Giancarlo for appearing before the
Committee.
I appreciate the CFTC's efforts to bring transparency and
integrity to crypto-currencies. I understand that the CFTC does
not have the authority to conduct regulatory oversight on
virtual currency platforms, but that it is working with a
number of agencies on multi-regulatory approach for crypto-
currency oversight.
What are your thoughts on the current multi-agency approach
and what is the most effective way, would you say, to regulate
crypto-currency?
Mr. Giancarlo. Thank you, Senator. It is tremendously
challenging. Bitcoin or other virtual currencies is a legally
traded product, and yet there is no Federal agency with direct
regulatory oversight over those spot markets. What I mean by
that is the ability to set standards, to determine capital
adequacy, best practices, how they deal with customers, what
are their cyber protections, what are their security
protections. There is no Federal agency that sets those
standards. We do not have the jurisdiction to do it, as we do
not in any spot cash market.
What we do have is enforcement authority for fraud
manipulation to the extent we are able to see it. As I
explained to Senator Klobuchar, we are a data-driven agency, so
having that data, or the lack of that data is very important.
With our new bitcoin futures products we entered into
unprecedented arrangements with those two exchanges offering
those products, to gather data from the five bitcoin spot
markets so that we can now start analyzing. So for the first
time, as a Federal agency, we can see data, at least in a
limited number of cases, in spot markets, so we can police them
for fraud manipulation.
Senator Thune. Do you think you need to have more
regulatory authority and resources to bring greater
transparency and integrity to those platforms?
Mr. Giancarlo. I think if it is the policy choice that
those platforms need direct supervision, then some agency will
need the resources to do it. We are not an agency that
traditionally supervises spot platforms, so it would be more
than a question of resources. It would mean a change of our
mission, of our mandate, of our approach. So it would be a very
significant change for us across the board, were we to take
that on.
Chairman Clayton and I thought, our first step should be to
just make sure the policymakers are aware that this is an
unregulated environment. It is a legal environment but it is an
unregulated environment.
Senator Thune. Let me shift gears real quickly. In March
2016, CFTC and EPA signed an MOU related to RIN markets. The
purpose of the MOU was, in part, to permit sharing of
confidential information, business information I should say, on
the RIN market so that the CFTC could advise EPA on, and I
quote ``techniques that could be employed to minimize fraud,
market abuses, or other violations and to conduct appropriate
oversight in RIN and renewable fuel markets.''
Have you given EPA any advice, and if so, what was it?
Mr. Giancarlo. Our advice is that the data that they are
collecting is--you know, there is an old saying in technology
and software, you know, garbage in, garbage out. If the data is
not terribly good, it is awfully hard to make heads or tails of
it, and one of the problems we had in analyzing the data was
that it was not really adequate to tell us--what they were
hoping that we could tell them which was the presence of
manipulation.
Senator Thune. So more and better data would help.
Mr. Giancarlo. Absolutely.
Senator Thune. Okay. We hope that you are a part of
providing advice on that subject. Obviously, as you know, there
is a lot of controversy and a lot of discussion around it.
Mr. Chairman, thank you, sir.
Chairman Roberts. I appreciate it, Senator. Let us see. We
have Senator Brown.
Senator Brown. Mr. Chairman, I share the concern of a
number of my colleagues. I know the Chairman has mentioned
this, Senator Smith mentioned it, about your budget, about the
fees. I particularly share the concern, I know--I mean, I know
you say you have enough, but I also know this agency has been
shorted in too many cases, and as you testified in the Banking
Committee last week, Mr. Chairman, about the demands created by
the emergence of virtual currencies, bitcoin and related
derivatives, that I am even more concerned about your budget.
So I hope that you will kind of relook at this, reflecting the
bipartisan concern here about your ability to do some of the
things that we think you need to do.
Just a statement. You do not need to respond to that.
I know that CFTC has recently announced some high-profile
enforcement cases on market manipulation and virtual
currencies. I am concerned, though, that the overall trend
shows a decline in enforcement actions and penalties. Fiscal
year 2017 showed a significant decline from prior year levels.
Democrats, especially, on Banking and on this Committee are
concerned that some of the new Trump regulators are a bit too
close to the industry, shall we say.
So explain, in that context, why we--sir, reassure us why
the downward trend in the enforcement data is not a bad thing.
It seems like a deliberate pullback in enforcement.
Mr. Giancarlo. So, Senator, you can understand, I became
Chairman in the middle of Fiscal Year 2017, and that year
really reflects the enforcement priorities of my predecessor,
not me, because enforcement actions take time to generate.
Also the Wall Street Journal article which, looked at that,
compared years where the CFTC had some extraordinarily large
awards against a few large banks, in the hundreds of millions
of dollars. So on those two points, a better trajectory is to
look at just recent activities. Just in the last month alone,
we have brought $100 million worth of settlements against Wall
Street banks, just in January alone.
I think you will see, going forward, an enforcement agenda
that reflects more of my priorities as opposed to perhaps my
predecessor's priorities.
In terms of--and I think if you----
Senator Brown. Are some of those penalties against repeat
offenders?
Mr. Giancarlo. In the--repeat offenders meaning banks that
have been fined or----
Senator Brown. Yes.
Mr. Giancarlo. Yes.
Senator Brown. Okay. I am concerned about--I mean, you do
not represent SEC. I understand that. I know that you, your
agency, and, I think you have--you have continued this--when
move on an action you send a press release, which is helpful, I
think, in sending that message. SEC does not always do that. So
do you believe that publicizing those major actions tends to
have a dampening effect on cheaters, on people going too far?
Is that sort of your purpose, and comment on that.
Mr. Giancarlo. Absolutely, Senator Brown. You know, one of
the criticisms that has been aired is the lack of criminal
activity. Now we do not have criminal enforcement activity, but
under my watch we just completed a very successful joint action
with the Department of Justice and the FBI in which we brought
criminal charges against a number of those, at some of these
Wall Street banks, that were manipulating markets, over the
last few weeks.
So I do believe that not only do press releases help but
also the actions that an agency is willing to take to work
across the aisle with other agencies to not only bring civil
charges but also criminal charges, sends a message that we are
serious about enforcing the laws.
Senator Brown. Would it help you if SEC would be--is
visibly troubled, if SEC would send out the same kinds of
releases you do, to send the message you send, that you think
is important to send? Would it be helpful if they would also do
that?
Mr. Giancarlo. I have to say, Senator, I am not familiar
enough with their practice to form a judgment as to its
adequacy. I know that we work hard to make sure that our press
releases send out the message that we are trying to send, that
we are serious about enforcement.
Senator Brown. I guess I would close, Mr. Chairman, by
asking that--I mean, I know that you and the SEC, you have sat
together in committee the other day, I know that you seem to
have a warm relationship. I would hope that you could use--I
know that you run this agency, he runs that agency, but I would
ask that you make clear to him, at some point, that you think
it is really helpful that you send those releases out and use
that to discourage bad behavior in those whom you regulate.
Mr. Giancarlo. Thank you, Senator.
Chairman Roberts. I thank the Senator. I think the message
the Chairman is trying to send out, there is a new sheriff in
town.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
Just to highlight, maybe, some of the macro issues that we
are confronting. A farmer, just a couple of minutes ago, gave
me this. This is U.S. farm income, 2013, $124 billion. U.S.
farm income, 2018, $70 billion. Farm income has been cut in
half, driven by low commodity prices, driven by disruption in
trade, which I know the Chairman is very active on, and we need
to continue to be active. But, also, I think there is a growing
challenge that we have in trying to figure out how we can
expand markets. That is why the RIN question keeps coming up.
That is why we keep talking about kind of your role in all of
this.
The last thing that we can afford is a distorted or
unproductive market, and for a lot of the commodities that are
grown in my State, the work that you do is absolutely critical,
and so preventing fraud, preventing manipulation, and seeing
market trends is absolutely critical. So, you know, we can talk
about all the other issues, crypto-currencies, but I think we
need to stay razor-like focused on how critical commodity
prices are to making a living on the farm.
You know, we do not want to--in farm country in my State we
want to grow crops, we want to market those crops, and we want
to make a living, and, you know, the ability to access the
market is critical, which takes me back to a question Senator
Klobuchar asked, which is about the cattle markets. I want to
thank you, Chris, for coming out to North Dakota. We had a
great trip where we talked about cattle markets, but we also
had an opportunity to talk about oil and oil futures, and
understand kind of what that shale play is. I took him to an
oil rig, so it was all very exciting----
Mr. Giancarlo. It was.
Senator Heitkamp [continuing]. in North Dakota. Your wife
is from South Dakota?
Mr. Giancarlo. No. My wife is from Long Island, New York.
Senator Heitkamp. Oh, well, that is too bad.
[Laughter.]
Senator Heitkamp. Well, you said she would have had fun.
Mr. Giancarlo. She was a 4-H girl and she understood a lot
better than I did on some of the farm issues.
Senator Heitkamp. Okay. So I just have a couple of
questions on crypto-currencies. I know--I did not get a chance
in Banking to ask you some of these questions, but one of the
stories that was recently highlighted in the media is that most
of the trading and most of the work that is being done on
crypto-currencies, whether it is bitcoin or other currencies,
is really going under the tax radar. So that the disruption
that may happen in other kinds of participation in markets may
transition to a crypto-currency market, because it is, you
know, the new hot thing. Also if you think that you can gain 35
percent, 20 percent, whatever your effective tax rate is, by
moving over, you know, that has some destabilizing effects, it
seems to me.
So can you comment about the tax consequences on crypto-
currency and what you think you and the SEC could be doing to
highlight that concern? After all, you know, Al Capone even had
to pay taxes, so even if we do not think that this is all
legitimate and some of it is nefarious, we need to know what it
is.
Mr. Giancarlo. Senator, thank you for that question, and I
know that a lot of people in the crypto community may be
watching this hearing so this is a very good opportunity to
remind them that taxes are due on crypto-currency transactions
that may be taxable. So this is not a, you know, off-the-grid
from a tax point of view environment. U.S. law still applies,
whether it is a crypto-currency transaction or anything else.
Senator Heitkamp. Typically, tell me what the 1099
consequences are of crypto-currency transactions.
Mr. Giancarlo. Well, the IRS treats it--I am not an expert
in this, but it treats it as an asset, and the depreciation in
the value of an asset means that a tax may be due for that
appreciation as a capital gain.
Senator Heitkamp. Yes. But typically, how the IRS would
know if I made a trade in the equity markets or in your markets
is I would get a 1099, and then there would be accountability.
Mr. Giancarlo. That is exactly right.
Senator Heitkamp. So tell me whether you think 1099s are
being enforced in the crypto-currency space.
Mr. Giancarlo. I do not have data to that. My suspicion is
not to a great extent.
Senator Heitkamp. Well, this is a problem, and it is a
problem that is going to continue to grow without some early
intervention. So, again, another whole incentive to move over
as people read that and say, ``Hey, if I can get a 20 percent
tax-free gain on, you know, a $10,000 investment, that looks
pretty good.''
Mr. Giancarlo. Mm-hmm.
Senator Heitkamp. So more reason to elevate our concern
about this----
Mr. Giancarlo. Yes.
Senator Heitkamp [continuing]. because it, in fact, maybe
become a choice that people make to move over.
Mr. Giancarlo. Indeed. Indeed.
Senator Heitkamp. Okay. Thank you, Mr. Chairman.
Chairman Roberts. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. I appreciate the
shout-out for 4-H. My girls were all State record book winners,
and it is truly an excellent program.
I wanted to get you to comment on, I know that you have
started, under your leadership, a process of simplifying and
modernizing the rules so that they are easier to comply with,
not weakening the rules but rather a way to make them less
burdensome. Can you update us on Project KISS?
Mr. Giancarlo. I would be delighted to, and it gives me a
chance to clarify any misunderstanding.
Project KISS is not about changing policy. It is a policy-
neutral program. It is about simplifying and making our laws
and our rules, our rules and regulations less complex, less
costly, less burdensome. When you think about it our desire in
the market is to bring more market participants in. When rules
are complicated it is real easy for the big players to hire the
lawyers necessary to go through complicated rules, but it is
harder for small firms. The simpler we can make our rules, with
the same policy implications, then the more accessible our
markets are for small and medium-sized firms, which, as we
know, are the engines of growth and job creation in this
country.
So we, just this morning, announced one of the elements of
our Project KISS initiative. Now our rules--our laws were first
written in 1937, in a number of cases, and some of our
provisions go back. One of the provisions is that all the
defined terms are alphabetized, and after you get to Z you
start over again. So you go from Z to AA, and then you go to AA
to ZZ, then you go to AAA. Well, we have gotten up to
quadruple-Z in our definition system, and that runs then
through the whole body of law that you have got to reference
back, and it makes for a tremendous mess when you are trying to
read these provisions.
So we are getting rid of the alphabetized approach. We are
just putting the defined terms in as they are, but it requires
us to go back through the whole rule set to redefine it.
This may seem like a lot of nothing, but believe it or not,
it simplifies the rule book, and it is just part and parcel of
good government. Every so often rules need to be simplified so
they are more accessible to the small and medium-sized
companies that might want to come into our marketplace, and
just find the rulebook too daunting. Now it may mean some less
billable hours for some Wall Street law firms or Washington law
firms, but you know what? It is good for American business.
Senator Boozman. Thank you, Mr. Chairman. It is refreshing
to hear that we are trying to simplify things, and, as you say,
that is one of the greatest deterrents to people not
participating, just simply not understanding something. So
thank you very much.
Chairman Roberts. Thank you, Senator.
Mr. Chairman, triple-Z?
Mr. Giancarlo. Quadruple-Z.
Chairman Roberts. Quadruple-Z. Better go back to triple-Z.
That sounds like a ranch. It is the Triple Z Ranch, or
something like that. Well, thank you for trying to clear that
up and get rid of that mess.
We are waiting on Senator Daines, who is on the way. Let me
just ask a real quick question.
You noted in your testimony, even as I speak--Senator
Daines, you are up, if you are ready, and I know you are always
ready.
Senator Daines. Mr. Chairman, thank you, and thanks for
testifying in front of the Committee. Good to see you, Mr.
Chairman.
Mr. Giancarlo. Thank you.
Senator Daines. With the emergence of market volatility
last week--I guess it was called the re-emergence; it happens
from time to time--it is times like this that emphasize the
CFTC's importance to regulating derivatives that allows
businesses like farmers, ranchers, and manufacturers to hedge
their risks. These instruments lock in their profits, which
could otherwise be eroded by either rising input costs or lower
sales. It is important that we do get regulations right,
including with your regulatory counterparts in the EU, as well
as in emergent technologies.
Last September, in Columbia Falls, there was a school
district that was hacked. It was allowing overseas hackers to
issue death threats to children in the Flathead region, and
their preferred method of payment was crypto-currency. It had a
chilling effect for many, many families in Montana,
particularly those up in the Flathead region.
A few weeks ago we had a Homeland Security Committee
meeting on preventing opioid producers from shipping fentanyl
into the country. Committee staff directly interfaced by email
with the sellers, learning how they actually operated. Their
preferred method of payment? Crypto-currency.
Mr. Chairman, could you share your guiding philosophy for
how the CFTC balances licenses to innovate with the need to
guard against the proliferation of illicit activity?
Mr. Giancarlo. Thank you for that, Senator. It is sobering
and upsetting, especially when we think about the children
involved and what we have been through in the last day. It is
troubling to know, but we do know that with a lot of these
crypto-currencies there is a lot of illicit use. Examples like
this give us an indication but we do not know, with hard data,
percentage-wise, how much of it is used for illicit activities,
but we do know it is being used in cases for illicit activity.
I met recently with the new head of FinCEN, the financial
crimes unit, and they assured me that their anti-money-
laundering procedure are in place for all domestic virtual
currency trading platforms, which we do not regulate at the
CFTC but about which we are concerned. We are broadly concerned
about the use of these virtual currencies for activities like
this, and yet no Federal regulator has direct authority. That
is something that I think, as policymakers, Congress, but also
the regulatory agencies, need to probably put first and
foremost on our list of what are the next steps and where we do
go next.
I think the industry itself has something to do in this
area as well. I know that in the UK now a number of virtual
currency platforms are banding together to develop a self-
regulatory organization to clean up the industry of this, and I
think that is something that they have not been called out on,
but to the extent that people who are advocates for virtual
currencies are listening, I think they need to know that they
have got a responsibility in cleaning up this industry, if they
really want it to be something that earns respect and becomes
part of not only our future but their future as well.
Senator Daines. I want to shift gears and talk about
blockchain. Both of the chairmen, my Chairman to my right and
my Chairman to the left here, were in Montana for our Ag
Summit. I thank both of you for coming, Mr. Giancarlo, and
thank you for that, Mr. Chairman.
You spoke about Project KISS.
Mr. Giancarlo. Yes.
Senator Daines. Keeping It Simple, Stupid--which is in
keeping with President Trump's broader regulatory agenda to
eliminate outdated and unnecessary regulations. We know that
reporting requirements, unregistered market participants poses
great overhead costs. I saw that firsthand when I was in the
private sector.
Could you share some of your efforts through LabCFTC to
pioneer blockchain technology?
Mr. Giancarlo. Sure. So before you joined us, Senator, I
was talking a little bit about Project KISS, and I was saying
that one of its goals is to simplify our rules so that small
and medium-sized companies can enter. I gave an example of
something we announced this morning.
I would like to give another example. One of the things
that an agency like ours does is use no-action relief to make
adjustments in the rules, and that body of no-action relief
appears in letters, but in no formal way that someone new to
the market can understand, really, the way our rules work. So
another element of Project KISS is to embody all of that--
hundreds of no-action letters into actual rulemakings so,
again, our rules are easier to understand for new players
coming into the market.
LabCFTC is our focal point for how we interact and how we
learn about all these new innovations. Fintech is probably the
most creative area of technology innovation right now. It is
transforming financial markets. We needed to find a way that we
could bring in talented people that understand these
technologies and open up a window. So with our LabCFTC, we have
held office hours in New York, Chicago, and recently in Silicon
Valley, because you cannot sit in Washington and say
``innovators, come to us.'' You have got to go to them, onto
their turf, and understand what they are doing, and have them
do demos. So that is what we are doing with LabCFTC.
Senator Daines. I am out of time, but Chairman Giancarlo, I
want to thank you. Your last comment, the fact that you are
getting out of this ivory tower of Washington, DC, out to where
the action is actually occurring. There is a lot of inaction in
this town, and you are out there where the people are. You
mentioned New York, you mentioned Chicago, you mentioned
Silicon Valley. You also came to Great Falls, Montana, for our
Ag Summit, and I appreciate that. Thank you.
Mr. Giancarlo. Thank you.
Chairman Roberts. Senator Daines, thank you very much for
some very pertinent questions.
That will conclude our hearing today. To the Chairman,
thank you for sharing your views on these important topics. You
have given this Committee much to think about as we continue to
look forward to the CFTC reauthorization and that challenge.
To my fellow members, we would ask that any additional
questions you may have for the record be submitted to the
Committee clerk five business days from today, or by 5 p.m.
next Friday, February the 23d.
The Committee is adjourned.
[Whereupon, at 10:47 a.m., the Committee was adjourned.]
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