[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
STATE OF THE CFTC
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MARCH 31, 2022
__________
Serial No. 117-31
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
49-768 WASHINGTON : 2022
COMMITTEE ON AGRICULTURE
DAVID SCOTT, Georgia, Chairman
JIM COSTA, California GLENN THOMPSON, Pennsylvania,
JAMES P. McGOVERN, Massachusetts Ranking Minority Member
FILEMON VELA, Texas AUSTIN SCOTT, Georgia
ALMA S. ADAMS, North Carolina, Vice ERIC A. ``RICK'' CRAWFORD,
Chair Arkansas
ABIGAIL DAVIS SPANBERGER, Virginia SCOTT DesJARLAIS, Tennessee
JAHANA HAYES, Connecticut VICKY HARTZLER, Missouri
ANTONIO DELGADO, New York DOUG LaMALFA, California
SHONTEL M. BROWN, Ohio RODNEY DAVIS, Illinois
BOBBY L. RUSH, Illinois RICK W. ALLEN, Georgia
CHELLIE PINGREE, Maine DAVID ROUZER, North Carolina
GREGORIO KILILI CAMACHO SABLAN, TRENT KELLY, Mississippi
Northern Mariana Islands DON BACON, Nebraska
ANN M. KUSTER, New Hampshire DUSTY JOHNSON, South Dakota
CHERI BUSTOS, Illinois JAMES R. BAIRD, Indiana
SEAN PATRICK MALONEY, New York CHRIS JACOBS, New York
STACEY E. PLASKETT, Virgin Islands TROY BALDERSON, Ohio
TOM O'HALLERAN, Arizona MICHAEL CLOUD, Texas
SALUD O. CARBAJAL, California TRACEY MANN, Kansas
RO KHANNA, California RANDY FEENSTRA, Iowa
AL LAWSON, Jr., Florida MARY E. MILLER, Illinois
J. LUIS CORREA, California BARRY MOORE, Alabama
ANGIE CRAIG, Minnesota KAT CAMMACK, Florida
JOSH HARDER, California MICHELLE FISCHBACH, Minnesota
CYNTHIA AXNE, Iowa JULIA LETLOW, Louisiana
KIM SCHRIER, Washington ------
JIMMY PANETTA, California
SANFORD D. BISHOP, Jr., Georgia
______
Anne Simmons, Staff Director
Parish Braden, Minority Staff Director
(ii)
C O N T E N T S
----------
Page
Scott, Hon. David, a Representative in Congress from Georgia,
opening statement.............................................. 1
Prepared statement........................................... 2
Thompson, Hon. Glenn, a Representative in Congress from
Pennsylvania, opening statement................................ 3
Witness
Behnam, Hon. Rostin, Chairman, Commodity Futures Trading
Commission, Washington, D.C.................................... 4
Prepared statement........................................... 7
Supplementary material....................................... 47
Submitted questions.......................................... 47
STATE OF THE CFTC
----------
THURSDAY, MARCH 31, 2022
House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 10:03 a.m., in Room
1300 of the Longworth House Office Building, Hon. David Scott
of Georgia [Chairman of the Committee] presiding.
Members present: Representatives David Scott of Georgia,
Costa, McGovern, Adams, Hayes, Delgado, Brown, Rush, Sablan,
Kuster, Maloney, O'Halleran, Carbajal, Lawson, Craig, Axne,
Schrier, Panetta, Thompson, Austin Scott of Georgia, Crawford,
LaMalfa, Davis, Allen, Rouzer, Kelly, Bacon, Johnson,
Balderson, Cloud, Mann, Feenstra, Miller, Moore, Cammack, and
Letlow.
Staff present: Lyron Blum-Evitts, Emily German, Josh
Lobert, Victoria Maloch, Ashley Smith, Paul Balzano, Caleb
Crosswhite, Kevin Webb, and Dana Sandman.
OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
The Chairman. Welcome, and thank you all for joining us
today at our hearing, which is entitled, The State of the CFTC.
And after opening remarks, Members will receive testimony from
our witness today, and then the hearing will be open for
questions.
So I want to say to you, Chairman Rostin Behnam,
congratulations on your appointment to this great, important,
and powerful position as Chairman of our CFTC. Good to have you
here.
And for those watching at home, I would like to kind of
share with you the important role of the CFTC and for all that
it is doing, as well as historically. It was first brought in a
bill to us and then it became its own independent entity.
First, of course, you were with the USDA, and now we have done
that. And it is so good to have you here. After brief opening
remarks, as I said, our witness will begin.
And for those of you who are watching on TV, I would like
to provide you with a little bit of background, as I said, and
let you know what a great moment this is for us. I do want to
say this, that I want to come into this meeting with you
understanding me as Chairman of our Agriculture Committee. I
want you to know that, first of all, I am a graduate of our
prestigious Wharton School of Finance where I got my MBA. And I
am saying this to you because since I have been in Congress, I
have been, shall we say, the protector of our great financial
system. I also served on the executive board of directors of
the Wharton School of Finance for a number of years.
And also, in coming here, in the 20 years that I have been
here, one of my foremost protective missions was for the CFTC.
And I hope you understand what I am saying because I have such
a great love and affection for our great financial system. And
nowhere was that manifested when I had to stand up against the
European Union when they wanted to take away the CFTC's right
to regulate our cross-border clearinghouses. It was I and
Ranking Member--I think it was Mike Conaway and Austin Scott.
We all got together, and we told the European Union, hell no.
You are not going to come and regulate any of our financial
institutions.
And so this is why this is important to me. I served on the
House Agriculture Committee for 20 years, 10 of those as
Chairman of the subcommittee on commodities, and the exchanges
and futures, as well as energy and credit. Again, that gives me
that credential. And even at the Wharton School, I was the one
that premiered and put together the major thesis talking points
on the great Alexander Hamilton.
So I am just sharing that with you because I want you to
understand my concern that I have with this cryptocurrency
situation. I will be getting into that during our question-and-
answer period, but I wanted you to know my background and my
love and affection for our great financial system. We have the
greatest financial system in the world and, as I said, brought
to us by none other than Alexander Hamilton. And I am sure you
know the story.
[The prepared statement of Mr. David Scott follows:]
Prepared Statement of Hon. David Scott, a Representative in Congress
from Georgia
Good morning and welcome to today's hearing as we get an important
update on the state of the Commodity Futures Trading Commission from
Chairman Rostin Behnam.
For those of you watching at home, I'd like to provide some
background on the important work of the CFTC. The CFTC's mission `is to
promote the integrity, resilience, and vibrancy of the U.S. derivatives
markets through sound regulation.'
Prior to the 1970s, USDA helped administer the Commodity Exchange
Act, however, the Commodity Futures Trading Commission Act of 1974
established the CFTC as an independent agency outside of the Department
of Agriculture with greater powers.
Chairman Behnam, I would like to extend a warm welcome to your
first hearing with us in your tenure as Chairman.
As you know I take a close personal interest in this area. Before I
became Chairman of the Agriculture Committee, I was Subcommittee
Chairman of the Commodity Exchanges, Energy, and Credit since it's
inception. Our Committee weighed in mightily during the exit of Britain
from the European Union to ensure that American markets were not harmed
or put at a disadvantage during the implementation of EMIR 2.2. I stand
ready to do so again if the need arises.
I would like to congratulate you on the emphasis you have been able
to place on the risk that climate change has presented to our markets
with recent establishment of the Climate Risk Unit.
CFTC was at the tip of the spear with the draft report issued by
the Climate-Related Market Risk Subcommittee of the Market Risk
Advisory Committee, Managing Climate Risk in the U.S. Financial System.
I share your concern about climate change and extreme weather and look
forward to working together with you.
In a 2019 Subcommittee hearing, I highlighted a letter you sent to
the CFTC's Office of Minority and Women Inclusion detailing the
diversity and representation profile of the senior and executive staff
at the Commission.
I said it then and I will say it again: diversity is a strength. I
am glad that you are now the Chairman of the CFTC and can guide this
important agency with an eye toward making sure that your staff and the
markets that they oversee are working for everyone.
In recent years we have seen an explosion of new markets and an
ongoing shift in the role that digital assets and cryptocurrencies play
in our financial institutions.
I look forward to hearing updates on CFTC's oversight in these
areas, as well as areas that we on the Committee should be shedding
more light on.
The Chairman. With that, Ranking Member, I will turn it
over to you for any comments you have, sir.
OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN
CONGRESS FROM PENNSYLVANIA
Mr. Thompson. Thank you, Mr. Chairman, much appreciated.
Chairman Behnam, welcome. It is a pleasure to see you again
and to have you before our Committee today to discuss the
current state of the CFTC and your plans for the coming year. I
want to begin by congratulating you on your unanimous
confirmation, well done, which was a significant vote of
confidence in you and for the Commission's work.
You have important responsibilities before you, and we look
forward to working with you and ensuring you have the tools to
carry out the mandates that we have vested with the Commission.
I would also like to congratulate you on the four nominees
to the Commission, Ms. Christy Goldsmith-Romero, Ms. Kristin
Johnson, Ms. Summer Mersinger, and Ms. Caroline Pham, who were
officially confirmed earlier this week and will be joining you
soon. The Commission works best when there is a full slate of
Commissioners, and I am pleased that that is where we are at,
and I am looking forward to that certainly in the coming weeks.
Finally, I want to offer a heartfelt thanks to Commissioner
Dawn Stump as she departs the Commission. Throughout her time
in this role, I have always appreciated her engagement and her
thoughtful approach to the issues. Our nation is better for her
service.
Chairman Behnam, you could not be appearing before the
Committee at a more consequential time. There is so much to
discuss. Two issues stand out for me: First, the war in
Ukraine, which has brought misery to the Ukrainian people, but
its effects are not isolated to Central Europe. Putin's
reckless crimes have roiled commodity markets, impacting
agricultural, energy, metal, and credit markets throughout the
world. The efficient and effective operation of our commodity
derivatives markets under the watchful eye of the CFTC plays a
pivotal role in helping end-users navigate these turbulent
times.
Second, I am heartened by your calls to expand the CFTC's
oversight of the digital commodity markets. As you know, I have
been hard at work on the Digital Commodity Exchange Act (H.R.
7614), legislation which provides the CFTC with jurisdiction
over the digital commodity spot markets. And as we consider
further regulations to protect consumers engaged with crypto-
trading venues, it is essential we do so in a manner that
promotes innovation. The CFTC is well-poised to play a leading
role in this effort.
I also want to touch very briefly on the Commission's
recent request for comment on FTX's proposal to amend its
derivatives clearing organization registration order. And thank
you for putting this out for public comment, in a very
transparent way. This request presents a number of novel
questions to the Commission to consider. It holds the promise
of lowering-cost for market participants and reducing end-user
risk through the clearing system but also raises significant
issues regarding market structures and risk mitigation that
should be explored frankly and publicly, and I commend you for
seeking input of market professionals and the public as a part
of your consideration of the request.
One key characteristic of the Commodity Exchange Act is the
flexibility it provides under its core principles for
businesses to experiment and to innovate new ways to meet
longstanding regulatory goals. It is through the consistent
application of these core principles that our markets and
financial markets have become leaders in innovation across the
globe.
Now, this proposal, like all proposals that come before the
Commission, should be measured against those core principles
that the CFTC has actually become well known for. And I look
forward to a meaningful, substantial, and, importantly, public
debate about both safety and innovation in our markets so
American derivatives markets will remain the most liquid, most
efficient, and most productive markets in the world.
Chairman Behnam, I really look forward to your comments
today, and thank you for joining us. And thank you, Mr.
Chairman, for this opportunity today. And with that, I yield
back.
The Chairman. The chair would request that other Members
submit their opening statements for the record so Chairman
Behnam may begin his testimony and to ensure that there is
ample time for questions.
Our witness today is the Chairman of the Commodity Futures
Trading Commission, Mr. Rostin Behnam. Chairman Behnam, we
welcome you to the House Agriculture Committee. And Chairman
Behnam, please begin when you are ready.
STATEMENT OF HON. ROSTIN BEHNAM, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION,
WASHINGTON, D.C.
Mr. Behnam. Thank you, Chairman Scott and Ranking Member,
for those comments. Before I begin, Mr. Chairman, I appreciate
your comments earlier. And quite frankly, we are lucky to have
you in the role you are in right now and given the experience
you have, so we appreciate that wholeheartedly from the CFTC's
perspective and look forward to working with you in your role
as Chairman.
Good morning, Chairman Scott, Ranking Member Thompson, and
Members of the Committee. I appreciate the opportunity to
discuss the state of the CFTC and provide an overview of
current priorities. Before I begin, I would like to acknowledge
my colleague and friend Commissioner Dawn Stump for her
tireless service and dedication to the agency. I also want to
thank agency staff. And finally, I do want to congratulate and
welcome Christy Goldsmith Romero, Kristin Johnson, Summer
Mersinger, and Caroline Pham, who, as Ranking Member Thompson
noted, were recently confirmed earlier this week.
As the agency continues transitioning away from and
considering life after the pandemic, we are witnessing
transformative change throughout our industry and in the
markets that we oversee. During this time of transition, I am
committed to collaboration and careful deliberation among our
core of new Commissioners, with stakeholders, and with our
regulatory peers as we address new and emerging risks and
opportunities. Under my leadership, the CFTC will exercise
utmost care, patience, and diligence as we move forward on
critical decision points.
However, this ongoing transformation will not distract the
CFTC from staying true to its historic responsibilities and
ensuring America's farmers, ranchers, manufacturers, and other
commercial end-users continue to have cost-effective access to
CFTC-regulated markets in order to manage risk. The derivatives
industry's population is shifting, having increasingly emerged
from the technology sector rather than traditional finance. We
are also seeing an influx of retail participants empowered by
information and technology. As a core purpose of the Commodity
Exchange Act is the promotion of responsible innovation and
fair competition, the agency will continue to provide a steady
hand as we make decisions that will impact our markets and the
larger economy in the years ahead.
Before I move to our agency priorities, I would like to
take a moment to provide a high-level overview of the CFTC's
response to, and our observations regarding, the ongoing
conflict in the Ukraine. The CFTC is on heightened alert with
respect to market functionality and resilience, and in
fortifying the agency against cyber attacks. Prior to the
invasion in anticipation of the possible implementation of
sanctions, I worked directly with the Treasury Department to
ensure that general licenses would be available where
appropriate and CFTC staff are in routine contact with
exchanges as its sanctions and related volatility may alter
affected index, currency, and physical commodity settlements.
As the invasion became a reality, the ongoing tragedy in
Ukraine has sparked extreme volatility with key markets
exhibiting 20 percent higher volatility as compared to that
observed prior to the invasion. By and large, the U.S. futures
markets have remained orderly through periods of high prices
and extreme volatility, consistently demonstrating strong
correlation between futures and cash prices and good
convergence towards contract expiration.
To date, the CFTC has observed a relative balance in buying
and selling, indicating that trading has not been panic-driven.
And despite episodic spikes in trading volume by as much as two
times normal level, markets have been able to clear the volumes
without significant market disruption.
CFTC surveillance staff are closely examining trading
activity for manipulative, inappropriate, or disruptive
conduct. Commission staff in the Divisions of Market Oversight,
Clearing and Risk, and Market Participants are actively
monitoring compliance by exchanges, self-regulatory
organizations, and intermediaries for trade processing,
execution, and clearing. CFTC staff are using every tool the
agency has to ensure that commodity markets continue to fairly
and transparently serve the intended price discovery and risk
management function, and this includes monitoring for excessive
speculation.
With the benefit of hindsight and real-time market
experience, a top priority of my chairmanship will be the
active review of the agency's Dodd-Frank rulemakings, ensuring
they remain fit for purpose as Congress intended. The market
turmoil related to the global pandemic tested the resiliency of
the derivatives markets and post-crisis reforms. In fact,
volatility in the global financial markets during March and
April of 2020 and the current volatility linked to geopolitical
issues continue to raise challenges related to liquidity and
margin requirements. This fuels active debate on the need for
additional tools and resources to manage risks, including
collateral management. Through all these events, U.S. central
counterparties remain strong and among the strongest in the
world.
Nonetheless, given the role of central clearing as a
critical tool in mitigating systemic risk and global financial
markets, the Commission expects to grow its stress-testing
program to help ensure resilience in absorbing both market and
systemic shocks in the future. The Commission will continue
working with our international counterparts. We will advance
thoughtful policy, encourage a collaborative approach that
supports strong and transparent regulation and preserves the
primacy of home country jurisdiction while discouraging the
appeal of racing to the regulatory bottom.
The effectiveness of the CFTC's Division of Enforcement in
holding individuals and institutions accountable promotes
confidence in U.S. derivatives markets. DOE will prioritize the
use of cutting-edge investigative and analytical techniques and
assert the CFTC's fraud and manipulation jurisdiction where
doing so preserves market integrity and protects the public. A
part of the enforcement program's success is rooted in its
Whistleblower Program. I am grateful to this Committee's long-
standing support of the Whistleblower Program and continue to
stand ready to ensure its long-term success.
The CFTC's enforcement program is only as good as the tools
we have to identify bad actors. To further support DOE's
efforts, I have directed our Division of Data to transform the
agency's analytics toolkit to leverage the cloud architecture
with advancements in artificial intelligence, machine learning,
and data analytics.
Recent market events highlights the increasing concerns for
potential cyber attacks against American critical
infrastructure, including U.S. financial markets. To that end,
I have directed staff in the Market Participants Division to
develop policy to address system safeguards for futures
commission merchants, swap dealers, and major swap
participants, further fortifying CFTC markets from an attack by
adding to the suite of system safeguards that are currently in
place.
As the CFTC and the derivatives and larger financial
industry accelerate towards migration to cloud technologies, we
are also mindful of the potential risks as we look forward to
exploring those benefits. President Biden's Executive Order on
Ensuring Responsible Development of Digital Assets acknowledges
that the growth and widespread adoption of digital assets
presents novel issues for all regulators. The CFTC will
continue its proactive approach in using our existing
enforcement authority in the digital asset commodity space to
protect customers and markets from fraud and manipulation. I
look forward to coordinating with fellow agencies, as outlined
in the Executive Order, and with Members of this Committee on
these important issues.
Turning to another area of increasing coordination, just
over a year ago I announced the creation of the Climate Risk
Unit to focus on the role of derivatives and understanding
pricing and mitigating climate-related risk and supporting the
orderly transition to a low-carbon economy through market-based
initiatives.
And finally, as one of my first official actions as
Chairman, I announced the hiring of the agency's first Chief
Diversity Officer to provide leadership and executive direction
on the Commission's efforts to integrate DEIA into every aspect
of our talent and business operations. Despite uncertain times
and great market volatility, I am optimistic and confident that
the CFTC will be able to meet the demands of the public and the
markets that we serve.
In closing, I wish to thank the Committee for its continued
support. We will always be judicious with our resources,
grateful for the privilege we have to serve, and request
additional funds when needed to meet the growing demands of the
agency and its markets. Thank you, Mr. Chairman, and I look
forward to answering your questions.
[The prepared statement of Mr. Behnam follows:]
Prepared Statement of Hon. Rostin Behnam, Chairman, Commodity Futures
Trading Commission, Washington, D.C.
Introduction
Good morning, Chairman Scott, Ranking Member Thompson, and Members
of the Committee. I appreciate the opportunity to discuss the state of
the Commodity Futures Trading Commission (the ``CFTC'' or ``Agency'')
and provide an overview of current priorities.
Before I begin, I would like to acknowledge my colleague and
friend, Commissioner Dawn Stump for her tireless service and dedication
to the CFTC and the markets we oversee. I also want to thank Agency
staff; their dedication and expertise ensures our greatest success
towards achieving our mission.
And finally, I wish to congratulate and welcome Christy Goldsmith
Romero, Kristin Johnson, Summer Mersinger, and Caroline Pham whose
nominations were confirmed by the Senate on Monday.
As the Agency continues transitioning away from and considering
life after the pandemic, we are witnessing transformative change
throughout our industry and the markets we oversee. During this time of
transition, I am committed to collaboration and careful deliberation
among our corps of new Commissioners, with stakeholders and our
regulatory peers as we address new and emerging risks and
opportunities. Under my leadership, the CFTC will exercise utmost care,
patience, and diligence as we move forward on critical decision points.
However, this ongoing transformation will not distract the CFTC
from staying true to its historic responsibilities, and ensuring
America's farmers, ranchers, manufacturers, and other commercial end-
users continue to have cost-effective access to CFTC regulated markets
to manage risk. To that end, I wish to acknowledge the key role that
the National Futures Association, our designated registered futures
association, and other industry self-regulatory organizations play in
safeguarding the integrity of the derivatives markets by, among other
things, ensuring that their members understand and meet their
regulatory responsibilities.
The derivatives industry's population is shifting, having
increasingly emerged from the technology sector rather than traditional
finance. We are also seeing an influx of retail participants empowered
by information and technology. As a core purpose of the Commodity
Exchange Act is the promotion of ``responsible innovation and fair
competition among boards of trade, other markets and market
participants,'' \1\ the Agency will continue to provide a steady hand
as we make decisions that will impact our markets and the larger
economy in the years and decades to come.
---------------------------------------------------------------------------
\1\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------
Right now, a confluence of unique externalities is having
consequential effects on markets and informing our most immediate
decision-making. In all that we do, the CFTC will, as it always has,
prioritize identifying, assessing, and evaluating risk. We will
continue to establish appropriate tolerances and guardrails within our
regulatory space to minimize disruption, maintain a level playing
field, and adhere to the letter and spirit of our mission and purpose
under the Commodity Exchange Act.
Recent Events
Before I move on to our key Agency priorities, I would like to take
a moment to provide a high-level overview of the CFTC's response to and
observations regarding the ongoing conflict in Ukraine. The CFTC is on
heightened alert with respect to market functionality and resilience,
and fortifying the agency against cyberattacks.
Prior to the invasion, and in anticipation of the possible
implementation of sanctions, I worked with the Treasury Department to
ensure that General Licenses would be available, where appropriate, and
ready to be used to manage and address exposures to affected market
participants. CFTC staff are in routine contact with exchanges as
sanctions and related volatility may alter affected index, currency,
and physical commodity settlements.
As the invasion became a reality, the ongoing tragedy in Ukraine
has sparked extreme volatility, with key markets exhibiting 20% higher
volatility as compared to that observed prior to the invasion. By and
large, the U.S. futures markets have remained orderly through periods
of high prices and extreme volatility, consistently demonstrating
strong correlation between futures and cash prices, and good
convergence towards contract expiration. To date, CFTC staff have
observed a relative balance in buying and selling, indicating that
trading has not been panic driven, and despite episodic spikes in
trading volume by as much as two times normal levels, markets have been
able to clear the volumes without significant market disruption.
CFTC surveillance staff are closely examining trading activity for
manipulative, inappropriate or disruptive conduct. Commission staff in
the divisions of Market Oversight (DMO), Clearing and Risk (DCR), and
Market Participants (MPD) are actively monitoring compliance by
exchanges, self-regulatory organizations, and intermediaries for trade
processing, execution, and clearing.
CFTC staff are using every tool the agency has to ensure that
commodity markets continue to fairly and transparently serve the
intended price discovery and risk management function, and this
includes monitoring for excessive speculation.
Current Agency Priorities
With the benefit of hindsight and real-time market experience, a
top priority of my Chairmanship will be the active review of the
agency's Dodd-Frank rulemakings, ensuring they remain fit for purpose
and as Congress intended.
The market turmoil related to the global pandemic tested the
resilience of the derivatives markets and post-financial crisis
reforms. In fact, volatility in the global financial markets during
March and April 2020, and the current volatility linked to geopolitical
issues, continue to raise challenges related to liquidity and margin
requirements. This fuels active debate on the need for additional tools
and resources to manage risks, including collateral management. Through
all of these events, U.S. central counterparties (CCPs) remain among
the strongest in the world.
Nonetheless, given the role of central clearing as a critical tool
in mitigating systemic risk in global financial markets, the Commission
expects to grow its stress testing program to help ensure resilience in
absorbing both market and systemic shocks.
The interconnectedness of global financial markets requires
persistent engagement towards maintaining resiliency and protecting the
financial system and U.S. economy from future crises and addressing any
duplicative cross-border regulation. To that end, the Commission will
continue working with our international counterparts, and participating
in international standard setting bodies and bilateral and multi-
lateral discussions. We will advance thoughtful policy, encourage a
collaborative approach towards a cohesive cross-border regulatory
framework that supports strong and transparent regulation, and
preserves the primacy of home-country jurisdiction, while discouraging
the appeal of racing to the regulatory bottom in individual
jurisdictions.
As we have demonstrated these last several years with the LIBOR
transition, safeguarding the stability of the U.S. and global financial
system requires ongoing international coordination and collaboration.
And while we can build consensus and identify and effectuate solutions,
as with LIBOR, we must resist the pull of complacency and continue to
remain responsive and vigilant to new risks as they emerge.
The effectiveness of the CFTC's Division of Enforcement (DOE) in
holding individuals and institutions accountable promotes confidence in
U.S. derivatives markets. DOE will prioritize the use of cutting edge
investigative and analytical techniques, and assert the CFTC's fraud
and manipulation jurisdiction where doing so preserves market integrity
and protects the public.
A part of the enforcement program's success is rooted in its
Whistleblower Program. I am grateful to this Committee's longstanding
support of the Whistleblower Program, and continue to stand ready to
ensure its long-term success.
The CFTC's enforcement program is only as good as the tools we have
to identify bad actors. To further support DOE's efforts, I have
directed our Division of Data to transform the agency's analytics
toolkit to leverage the cloud architecture with advancements in AI,
machine learning, and data analytics. This will provide our robust
surveillance and monitoring capabilities with automated systems,
helping to ensure our markets have the utmost integrity and
transparency.
Recent market events highlight the increasing concerns for
potential cyberattacks against American critical infrastructure,
including U.S. financial markets. To that end, I have directed staff in
the MPD to develop policy to address system safeguards for futures
commission merchants (FCMs), swap dealers, and major swap participants,
further fortifying CFTC markets from an attack. These policies, if
enacted, would complement the suite of system safeguards currently in
place for CFTC registered central counterparties (derivatives clearing
organizations or ``DCOs''), designated contract markets (DCMs), swap
execution facilities (SEFs), and swap data repositories (SDRs).
The CFTC, along with the derivatives and larger financial industry,
is accelerating our migration to cloud technologies to store, analyze,
and ingest this data more cost-effectively and efficiently. We are also
mindful of the potential risks as we look forward to exploring the
benefits. We will continue to be vigilant in our own progress and
ensure that our registrants instill and employ a high level of
oversight and due diligence with respect to related resilience planning
and operational risk management.
New & Emerging Risks
President Biden's recent Executive Order on Ensuring Responsible
Development of Digital Assets acknowledges that the growth and
widespread adoption of digital assets presents novel issues for all
regulators. Against this backdrop, the CFTC has actively used our
existing statutory authority to deter fraud and manipulation in these
emerging markets. The CFTC will continue its proactive approach in
using our existing enforcement authority in the digital asset commodity
space to protect customers and markets from fraud and manipulation. I
look forward to coordinating with fellow agencies as outlined in the
Executive Order. Concurrently, I look forward to working with Members
of this Committee on these important issues.
Turning to another area of increasing coordination, just over a
year ago, I announced the creation of the Climate Risk Unit (CRU) to
focus on the role of derivatives in understanding, pricing, and
mitigating climate-related risk, and supporting the orderly transition
to a low-carbon economy through market-based initiatives. The CRU is
primarily responsible for accelerating early CFTC engagement in support
of market-driven processes in the climate space, and building
resiliency from the effects of climate change.
Finally, I spent the last several years at the CFTC raising
concerns regarding the lack of diversity, equity, inclusion and
accessibility (DEIA). Earlier this year, as one of my first official
actions as Chairman, I announced the hiring of the agency's first Chief
Diversity Officer (CDO), to provide leadership and executive direction
on the Commission's efforts to integrate DEIA into every aspect of our
talent and business operations.
Conclusion
Despite uncertain times and great market volatility, I am
optimistic and confident that the CFTC will be able to meet the demands
of the public and markets we serve, as we build our resources and
staffing in critical areas to address new and emerging risks,
cautiously shepherd innovation, and remain true to our core purpose in
providing a means of managing and assuming price risks, discovering
prices, and disseminating pricing information through trading in
liquid, fair and transparent markets.
In closing, I wish to thank the Committee for its continued support
of the CFTC. This year, as the Agency stands on the precipice of
transformative change alongside our markets, we will inevitably face
new challenges requiring new and perhaps novel solutions. We will
always be judicious with resources, grateful for the privilege we have
to serve, and request additional funds when needed to meet the growing
demands of the Agency.
Thank you and I look forward to answering your questions.
The Chairman. Chairman Behnam, thank you. Thank you very
much for your important and very significant and timely
testimony.
At this time, Members will be recognized for questions in
order of seniority, alternating between Majority and Minority
Members. You will be recognized for 5 minutes each in order to
allow us to get to as many questions as possible. And, as
always, please, keep your microphones muted until you are
recognized in order to minimize any background noise.
Chairman Behnam, I recognize myself for the first 5
minutes. And as I mentioned to you, my deep love and affection
for our financial system, I believe I am in this place at the
right time to do good work. And I call to your attention
immediately just to give you an example, I referred to what the
leadership on this Committee, both Democrats and Republicans,
have done. But let me just give you an example going back to
our derivatives, our cross-border, our clearinghouses. It was--
that's not that. But when Great Britain finally got their
Brexit, you know what they wanted to do to us because we were
Great Britain's equivalency partner, they said, ``Well, hey,
let's put the United States in third country.'' I hated that
right there. We are if nothing more than a first country. And I
found out what third country was.
But here is the point I am making. The reason that they
went around in Europe and to others and said we need to do that
is because this Congress has failed to reauthorize the CFTC for
almost 12 years now. That is a weakness. We need to change
that. And we are going to move to change it, to reauthorize it
because people will say, ``Well, hey, if they have not been
reauthorized by the Congress to be the regulatory agencies for
our clearinghouses and for this, well, the European Union will
stick in.'' So there are little things like that that we have
to be careful of and watch.
But let's get to this specific issue that concerns me
greatly, and that is with our cryptocurrency business. Now, I
understand that there is a proposal pending at the CFTC by a
cryptocurrency exchange that is seeking approval to operate a
new and untested exchange, that is seeking approval to operate
in a new and untested system of clearing derivative trades. And
I am very concerned about this, very much concerned about this
proposal and the broad implications it poses, just like the
other things that we have had to protect our financial system
from and the implications across our markets and our
intermediaries within this market.
And it is not just impacting cryptocurrency. We are dealing
with it all over. I am also on the Financial Services Committee
in the House. We are dealing with it there. There is so much
unknown about this.
And so, as I said to you before, ever since the financial
crisis, we have been moving to make sure that the CFTC's
regulatory safeguards governing derivatives markets are the
strongest that the world will have, and that the world will
have full confidence in these critical markets. So I am very
concerned that approval of this proposal, without due and
proper consideration, will put all of that hard work at risk by
allowing an untested, an unproven system that could very well
make our derivatives regulatory system riskier and our customer
protections much weaker. Your thoughts, Mr. Chairman?
Mr. Behnam. Thank you, Chairman Scott. It is a very
important question and a very important issue, and I would just
assure you and this Committee that, as we are considering and
contemplating the FTX proposal, we are doing it cautiously, we
are doing it very deliberately, and we will be very patient as
we consider the proposals and how they intersect and interact
with the Commodity Exchange Act and, more importantly, the core
principles.
At this point, we have done a number of months of review
within the Division of Clearing and Risk with FTX. At a point
about a month or 2 ago I decided that, given the novelty of the
issue and exactly what you pointed out, the unknown risks and
the novelty of the market structure, that it was important for
us to put out the proposal for public comment. I initially put
out for 30 days. I extended that to 60 days, and we are in the
middle of the public comment period to get ideas from all
market participants, from academics and public interests, to
see what their thoughts are on the market structure itself and
the risk.
I would say more generally two important things. Despite
the novelty, as Chairman, I feel I have the responsibility to
give every stakeholder, every market participant an opportunity
to share their views and to present ideas that they have for
the market. I think that is the responsibility of the agency
and the U.S. Government.
The second part is within the Commodity Exchange Act,
specifically Section 3 [7 U.S.C. Section 5], we are mandated to
support responsible innovation. And in many respects this
proposal could be a turning point or an inflection point for
market structure. I don't know that. I don't believe that right
now, necessarily, but I do think I have to consider the
proposal in case there is a possibility for a new market
structure that could provide innovation, provide more efficient
markets, better pricing, and better hedging tools.
I would just use a quick example going back 30 years when
electronic trading--underscoring electronic trading was
starting to manifest itself. You probably had a lot of
individuals on the iconic trading floors in Chicago and New
York who were hesitant to think about electronic trading taking
over our markets. But now here we are in 2022, electronic
trading is fully embraced, and it is a technology that supports
the innovation concept.
The Chairman. My time is rapidly approaching, in a little
bit it has gone over, but this needs far more review. It needs
more oversight. This is a situation that I think that, based
upon the concerns that I have heard, that this proposal
thoroughly considers all of the potential impacts that it could
have on this and particularly many of our clearinghouses and
those people that we have always had to come in to help. So
what I am asking is that we really put some good oversight to
this, make sure questions are answered, and I also want to hear
from the other side of this.
And so I want everybody to know that I am going to put
together a hearing on Tuesday, May 17th, and I am inviting to
get their thoughts on this so we make sure that all sides are
answered and have their concerns, so I am going to extend
invitations to the CEOs of CME and ICE, the Intercontinental
Exchange and Chicago Mercantile Exchange folks. We need to hear
from everybody on this. You need to hear from them. We all do,
just like we have had to do in previous occasions.
As I said before, I take great pride in being the number
one protector of our great nation's financial system here,
serving both on our Financial Services Committee and here as
Chairman. And so I appreciate this, and I appreciate your deep
consideration. I am very concerned about this. Ranking Member,
I will turn it over to you.
Mr. Thompson. All right, Mr. Chairman, thank you. Chairman
Behnam, I want to continue in the digital commodity space. I
published a draft discussion of my Digital Commodity Exchange
Act in November, and I am in the process of putting the
finishing touches on that bill after receiving input on the
draft from stakeholders. The discussion draft was grounded in
five principles: number one, foster innovation, number two is
to protect the market participants, number three is reduce
complexity, four is to promote principle-based regulation, and
five is to complement existing authorities where appropriate.
Chairman Behnam, do you think that those are the
appropriate principles that we should be considering as we
explore regulating cash digital commodity markets?
Mr. Behnam. Thanks, Ranking Member Thompson. I do. I think
at its core many of the responsibilities that a potential
digital asset marketplace or market structure would need are
the same that we utilize and enforce and implement within the
derivatives space. Obviously, the underlying asset is very
different, but in terms of market structure and the principles
that you just outlined, those are certainly a great starting
point and something to build off of.
Mr. Thompson. Excellent. If the CFTC were granted authority
over the cash digital commodities market, would you adopt these
same foundational principles in your associated rulemakings?
Mr. Behnam. Yes.
Mr. Thompson. Very good. Well, I certainly encourage all my
colleagues, on both sides of the aisle to join me in this
effort. We haven't introduced a bill yet. We would love to have
a unified original cosponsor. We tend to do best when we speak
with one voice in the Agriculture Committee.
I want to revisit what the Chairman was talking about. You
recently requested comment on a proposal by FTX that would
allow it to provide direct clearing of margin trades by
customers without the use of a futures commission merchant
intermediary as it is traditionally done by clearinghouses.
Chairman Behnam, I want to thank you for requesting public
comment on this unique approach once again, and thank you for
extending the comment period to ensure stakeholders have
sufficient time to comment on this novel request or proposal. I
appreciate your efforts to ensure that the Commission gives the
proposal and the comments their full consideration, that the
review process is transparent.
But I would like to understand a little better the review
process for an application like this and what steps beyond
public comment periods will the Commission take to understand
the impacts of the proposed changes requested in this
application or any application? We are really looking at what
are the structures within the Commission for these types of
proposals.
Mr. Behnam. Thanks, Ranking Member Thompson. There actually
isn't a formal legal requirement about a process, per se. As I
pointed out to the Chairman, we have been working with FTX for
a number of months now in advance of releasing the public
comment, and there is no prohibition or requirement that the
current market structure be in place for existing market
participants. So as of now, the FTX proposal, albeit novel, is
neither prohibited nor in violation of the CEA. So we have gone
through those first steps.
We are going through this comment period right now, which
will last to about the beginning of or mid-May. And then my
intention, and my intention all along, was to conduct a staff
roundtable towards the end of May and have a larger
conversation about non-intermediation, not about FTX
specifically, but just generally about non-intermediation. And
the reason I think that is important is because this proposal
from FTX is not the first proposal the CFTC has received on
non-intermediation, and I assure you, regardless of what
happens with FTX, approval or rejection, there will be more in
the future. This is just a product of technology and the
ability to create efficiencies potentially in market
structures, so I think it is important as an agency,
collectively with your input, that we start to dig into these
questions, identify risks, identify opportunities, and hear all
viewpoints so that we move in a more informed way and move
towards a decision that is comprehensive, that is patient, and,
as I said, deliberate so that we know all the facts about the
proposal.
Mr. Thompson. And thank you for that. And once the
Commission has completed its review and is satisfied with its
understanding of the application initially, what does the rest
of the process look like? For example of some questions if you
are able to answer them, is the Commission able to modify the
proposal?
Mr. Behnam. So the Commission could modify the proposal,
but it would be really up to the registrant, in this case, FTX,
if they were comfortable with the required modifications. This
certainly happens a lot as we intersect or have conversations
with market participants. There are some things they may want
originally in a proposal, and we say, ``Look, this doesn't work
because of our core principles or regulations. You need to
tweak it here, tweak it there.'' And often registrants are
comfortable with that. But depending on the modifications, it
would really be up to FTX.
Mr. Thompson. Yes, and just real quick and I know I am
over, I apologize, Mr. Chairman, but I think it is helpful for
us to understand the process.
The Chairman. Yes.
Mr. Thompson. Does the approval of this type of application
require a majority Commission vote?
Mr. Behnam. It does.
Mr. Thompson. Okay. And this one may be asking for a
crystal ball for you, and I understand that, but do you have
any idea when will the Commission be in a position to vote on
the application?
Mr. Behnam. Ranking Member Thompson, only when we, and
specifically myself as Chairman, feel that we are very
comfortable with the proposal, we have checked all our boxes,
we have looked at the structure and I feel like the Commission
could make a vote that is well-informed after debate and
consideration and hearing from all constituents.
Mr. Thompson. Well, I don't think I am overreaching when I
say I think both the Chairman and I appreciate that response
when you are ready to make that decision. Thank you, Mr.
Chairman. Thank you, both Chairmen.
The Chairman. Thank you. And now I recognize the
gentlewoman from North Carolina, Ms. Adams, who is also the
Vice Chair of the Committee on Agriculture. You are recognized
for 5 minutes.
Ms. Adams. Thank you, Mr. Chairman. Thank you, Ranking
Member Thompson, for hosting today's hearing. And to Chairman
Behnam for testifying, thank you for being here today.
Moreover, even though they are not here today, I do want to
take a moment to congratulate our new Commissioners on their
confirmations. Congratulations to Commissioners Christy Romero,
Kristin Johnson, Summer Mersinger, and Caroline Pham.
So Commissioner Behnam, as you may know, I sit on both the
Agriculture and Financial Services Committee, where I oversee
our financial system and agricultural markets. I understand
that the CFTC has a request for comment out on FTX's
registration order. I am not looking for you to comment on an
ongoing process. Having said that, would you please speak to
the implications of eliminating the current regime for
intermediaries in the decentralized finance space?
Mr. Behnam. Congresswoman, thanks for the question. As I
said earlier, it really is an ongoing deliberation of what
benefits and risks this proposal may present. As you point out,
rightfully so, this is a novel concept about non-intermediation
between end-user or retail investor and the exchange in the
clearinghouse, but as we have been digging into the proposal,
much of my thought has been focused on what our responsibility
is as the CFTC is to engage with stakeholders, to hear and
listen to their presentations and to view them in light of
possibilities as much as risk. So I would certainly never be
comfortable with allowing a proposal to be put into a market if
we didn't think certainly it met our core principles and our
regulations but that if customer protections were at high risk.
However, as I pointed out earlier, it is very clear in the
statute that we as the CFTC have a responsibility to support
responsible innovation. And there is a possibility that within
this market structure, given technology, given the ability to
break down some of the segments between retail participation
and trade execution, that this proposal could end up leading to
more efficient trade execution and less risk in the system.
Ms. Adams. So let me move on. Okay. Thank you so much, and
I want to get to a couple of other questions. So let me move to
another topic. I commend your stated efforts on improving
diversity and inclusion at the CFTC, along with your work to
create the agency's first Chief Diversity Officer. The need for
a CDO is important. And according to the CFTC, the employee
breakdown of management is woefully homogenous with only 14
African Americans, ten Asian Americans, five Hispanic Americans
at the grade level 15, and only 33 percent of your senior level
employees are women. Number one, first of all, I do find that
troubling. So what is your strategy to increase racial, ethnic,
and gender diversity at the CFTC? And will the Commission plan
to include recruitment from historically Black colleges and
universities and minority-serving institutions?
Mr. Behnam. Thank you, Congresswoman. To answer your second
question first, yes, absolutely, and that is a part of the
strategy with the Chief Diversity Officer, which I appreciate
your recognition. I think this is a huge step for the agency.
We are going to break down a lot of the silos and barriers that
I think have restricted the agency in the past so that we can
essentially be casting a wider net for recruitment and to
support retention at the entry level all the way up to the
senior level. I am optimistic about the future. It is going to
take time, but I think with the inclusion of the Chief
Diversity Officer and a real momentum towards expanding our
scope and our invitation to potential employees, we have a real
opportunity to diversify the agency.
Ms. Adams. Well, certainly, and we look forward to that.
And whatever help my office can give, I do chair the bipartisan
HBCU Caucus, and we have the connections with our Partnership
Challenge, and we will be happy to offer assistance to you.
Thank you, sir. Mr. Chairman, I am going to yield back.
The Chairman. The gentleman from Georgia, Mr. Austin Scott,
is now recognized for 5 minutes.
Mr. Austin Scott of Georgia. Thank you, Chairman Scott.
And Chairman Behnam, in your testimony you highlight the
fact that these are uncertain times and there is currently a
lot of volatility in the markets. I think you used the term
systemic shock. If you read any of the financial news, you see
the terms weaker fundamentals, yield inversion, the word
recession is being used increasingly, housing bubble. All of
those things are very concerning to me, and especially at the
point that the world is facing what it is with the Russian
invasion of Ukraine and the potential food shortages in Africa
and Asia and the lower-income parts of the world.
That being said, how important would you say it is for us
in Congress to figure out a way to allow our derivative
clearing organizations and other clearing agencies to access
the Federal Reserve to secure their cash?
Mr. Behnam. Thanks, Congressman. I want to be clear as I
respond to this question, that notion and the idea that you are
proposing is not within the CFTC's jurisdiction. This would be
a decision by the Federal Reserve.
Mr. Austin Scott of Georgia. That is right.
Mr. Behnam. But speaking on behalf of the CFTC and the
regulated clearinghouses that we oversee and the conversations
I have been having with them, I do think, given the volatility
we have seen in the market, given what feels like a more
frequent period of shocks to the system, right, whether it was
COVID 2 years ago and now the Ukraine crisis, that the
collateral movement and the size of the CCPs and the volatility
that we are seeing, it is extremely important to consider this
proposal and this idea of having Fed accounts for CCPs.
Mr. Austin Scott of Georgia. Well, I look forward to
working with you to help make that happen. And this should not
be that hard to do. And it would benefit everybody I think to
have the cash secured at the Federal Reserve. There is no safer
place for the system than to have that cash at the Federal
Reserve.
One other thing I want to mention, I currently have a bill,
the Commodity Futures Trading Commission Research and
Development Modernization Act (H.R. 4337). It would grant you,
the CFTC, the authority to interact with fintech innovators for
research, development, and innovation purposes. Now, research
and innovation that helps with risk management is good. If it
leads to excessive speculation, then I think it is bad. And I
want to share my concerns about FTX that were expressed
earlier. But with the world changing as rapidly as it is, can
you speak to the importance in how we bridge the gap to the
CFTC and the fintech industry so that you as a regulator better
understand the emerging technologies and how to regulate the
markets?
Mr. Behnam. Thanks, Congressman. And I do appreciate your
leadership on that bill. We did recognize that the CFTC had a
number of barriers that we had to engage with entrepreneurs and
innovators. And I think it is important. We have always been a
leading agency in innovation and technology. Markets,
especially in the derivatives space, tend to begin with trading
in our markets, and this is best exemplified with the listing
of the Bitcoin futures contracts back in 2017, which seems like
years ago. But it is important that we have that authority and
the ability to engage with fintech and entrepreneurs because it
gives us a better sense of risks in the market, how our markets
can support innovation, price discovery, and risk management
because, as we know in all sectors of industry, whether it is
ag or manufacturing, having financial markets to be able to lay
off risk and mitigate risk supports innovation and growth, that
supports research and development and every other thing that
large companies need to support their growth over time. So, we
continue to support your efforts here in whatever we can do to
break those barriers down so that we can have more
communications with entrepreneurs.
Mr. Austin Scott of Georgia. Mr. Chairman, briefly, I will
tell you I do think that with the volatility in commodity
prices and the input prices in agriculture, I do think that we
are going to need to make sure that our farmers and others are
able to hedge their risk in the most efficient manner as
possible, and I appreciate your work to help make that happen.
And with that, Mr. Chairman, I will yield back the
remaining 20 seconds.
The Chairman. Thank you, Mr. Scott.
And now the gentlewoman from Connecticut, Mrs. Hayes, who
is also the Chairwoman of the Subcommittee on Nutrition,
Oversight, and Department Operations is recognized for 5
minutes.
Mrs. Hayes. Thank you, Mr. Chairman, and thank you,
Chairman Behnam, for being here today. My questions for you
today are going to focus on the Commodity Futures Trading
Commission's Whistleblower Programs. Since the program was
established in the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111-203), the Commodity Futures
Trading Commission has relied on whistleblower disclosures to
identify cases of fraud and other illegal activities and to
collect fines on behalf of the American people. The CFTC's
Customer Protection Fund established by Congress in 2010 is
funded through those fines and used to reward whistleblowers
for their disclosures.
Since issuing its first award in 2014, the CFTC has granted
whistleblower awards amounting to approximately $300 million.
The information provided by these whistleblowers is crucial and
ensures that we are able to properly enforce the Commodity
Exchange Act.
First, Chairman Behnam, in 2020 the CFTC reached out to
Congress with concerns that, as a result of several large
whistleblower awards they expected to pay, there would be a
shortfall in the fund used to pay whistleblower awards and fund
administration of the Office of Consumer Education and the
Whistleblower Office. As a result, Congress passed a short-term
legislative fix which will expire at the end of this fiscal
year. My question is have those large awards since been issued?
And looking ahead to the expiration later this year, do you
expect that there will again be a shortfall at the CFTC?
Mr. Behnam. Congresswoman, thank you for the question. It
is extremely important. The short answer to your question about
those awards being rewarded is, yes, they have been rewarded.
And to your second question, I cannot say with certainty
whether or not we will have a shortfall. So much of this is
unknown, and I think if you go back to Dodd-Frank, you couldn't
have contemplated some of the rewards that we distributed in
the recent past. They are very, very significant, and they are
products of the LIBOR fraud cases from a few years ago.
But to your point and to support what you just said, this
is more evidence of the importance of the Whistleblower Program
and how we are able to root out fraud and manipulation with the
support of whistleblowers. So I can't say for certain whether
or not we are going to run out, but it sounds like you would
support what I am about to say is that I think we should err on
the side of it is possible and we need to have the program
fixed as soon as possible so that we can have the staff in
place, that the Consumer Education Fund can be funded
appropriately, and that we could have the funds to provide
whistleblowers when those cases are filed.
Mrs. Hayes. You are absolutely right. I think that the
Whistleblower Program is extremely important. And we saw that
it reached record highs in 2020. What do you believe this was a
result of? Was it increased violations, better enforcement, or
just an atmosphere where people feel that there is a process
for expressing their concerns about fraud?
Mr. Behnam. I think it is a combination of all of those
things. I certainly think over time since 2010 when Dodd-Frank
was passed and this provision was put into law that more
individuals within the financial system are aware of the
benefits of the Whistleblower Program and that they could come
to the agency, feel protected, that what they are about to do
is not going to come back to them and that they will be
rewarded for their service to the government and to the
American people and the American financial system.
But more notably I did mention this and you probably recall
that we had some very, very significant cases filed and settled
in the past 5 to 10 years regarding the LIBOR fraud and
manipulation. And those were hundreds if not billions of dollar
cases that ended up resulting in some of these significant
fines. Will we see them again in the future? Again, I can't
predict, but I would prefer to err on the side of caution and
say we need a very resilient and strong Whistleblower Program
with a very strong and resilient fund so that we can continue
this program in support of American financial markets.
Mrs. Hayes. Well, thank you so much for your time and for
your testimony today. And I am mindful of the time, but I
cannot end my testimony without just saying how proud I am to
be from Connecticut where Senator Chris Dodd, this was so
incredibly important to him, and he worked so hard for this
legislation to be passed. And I encourage you, Chairman Behnam,
that if problems that are uncovered that require Congressional
action, that they are brought to our attention immediately
because this is something that I think is critical to ensuring
that our financial markets and all of our actors are playing by
the same set of rules.
With that, Mr. Chairman, I yield back.
The Chairman. Thank you very much. And now the gentleman
from Arkansas, Mr. Crawford, is now recognized for 5 minutes.
Mr. Crawford. Thank you, Mr. Chairman. And thank you,
Chairman Behnam, for being here today.
And I guess there has been a lot of talk about crypto, so I
am going to go crypto just real quick. I guess it is safe to
say that crypto is here to stay. Would you agree?
Mr. Behnam. Yes, sir.
Mr. Crawford. Yes. So having said that, I think most people
would agree with that statement. I know you supported
legislation that would expand CFTC's jurisdiction over digital
commodities markets. Can you talk about that a little bit, why
you think that is a good choice?
Mr. Behnam. Well, I think in order to--on two sides of the
equation is, one, there are risks inherent in the market right
now. It is a largely unregulated market. We have some state
transmitter licenses that are really directing the regulatory
space. And there are benefits to that, but it is not enough,
quite frankly. And what we are seeing in terms of the growth
and the scale of the market, it is a very retail-oriented
market. It is highly speculative, and we have seen that with
price movements in some of the larger digital assets. I think
it is incumbent on Congress and regulators to work together to
have a structured regulatory regime around markets. It will
both protect customers, reduce market stability issues, create
market resiliency, which is extremely important, ultimately
protect customers, and then possibly have the benefit of
supporting innovation if there are outcomes that we are going
to see beneficial in the future.
Mr. Crawford. Do you think we need statutory language that
defines digital commodities and digital securities?
Mr. Behnam. Yes, it would be extremely important to do
that.
Mr. Crawford. Thank you. I appreciate that. I want to shift
gears a little bit with you. My colleague Mr. Scott mentioned
this, and you and I had a conversation earlier this week
alluding to this, and that is the growing need I think for
farmers to be adequately hedged using these tools that are
regulated by the CFTC. And so what we discussed the potential
for CFTC being a lead agency in extension outreach to educate
end-users, primarily agriculture producers on how they can
benefit. Can you talk a little bit about how that might look?
Mr. Behnam. Sure. Thank you for the question, and I really
enjoyed speaking with you about this. We have a very well-
built-out Customer Education Office within the agency. I
pointed out to you and this Committee knows well we are rooted
in agriculture. We were once part of USDA. And, as I said in my
statement, I think it is a priority of mine to ensure that
American producers understand our markets and feel that they
have a cost-effective risk management tool in American futures
and options markets.
And there are many challenges, there are many risks, there
are obviously other programs that USDA provides which are
critically important, but CFTC markets should just be another
tool in the toolbox for American farmers and ranchers to hedge
extreme volatility, extreme price risk, which we continue to
see over the years. So I would certainly welcome to work with
you, with folks back in Arkansas, use the extension program
across the country, and utilize our education office to inform
folks about markets to answer questions if necessary and to do
whatever we can to support at the producer level, at the
elevator level, and everyone in between so that they know CFTC
markets are available and an effective risk management tool.
Mr. Crawford. Well, I appreciate that, and we will
definitely look forward to working with you on that front.
One thing I have to mention and I would be remiss if I
didn't, and that is the impact that China has on our
commodities markets. And I am just curious what tools are
available to you--and I am not even sure if this is the best
venue to address this question, but what tools are available to
identify or to identify red flags as it applies to China and
the potential for them to manipulate markets? Do you have any
of those tools available? And what actions can be taken to
prevent that?
Mr. Behnam. Well, certainly for domestic markets we have
the tools we need from a surveillance perspective and a market
oversight perspective. We definitely have international
participants in our markets and we observed that with the
crisis in Ukraine identifying folks who are on the sanctions
list. So we are able to see participants, identify where they
are from, and if there were a case of fraud or manipulation
from individuals in China, we would be able to root that out.
We are seeing that market grow pretty extensively over the
past couple years. There are a number of futures markets in
China. I think on the one hand we are going to need to work
with those individuals and those institutions. China obviously,
as this Committee knows, is a huge purchaser of American
agricultural products. But I feel very strongly that we need to
ensure our commodity markets remain the strongest in the world.
They benchmark major commodities across the ag complex, energy
complex, and the metals complex, and those are the types of
things I will be thinking about and looking forward to working
with you to ensure that resiliency and primacy of American
agriculture in our markets over the decades to come.
Mr. Crawford. Thanks so much. I yield back. Thank you.
The Chairman. Thank you. And now the gentlewoman from Ohio,
Ms. Brown, is recognized for 5 minutes.
Ms. Brown. Thank you, Mr. Chairman, Chairman Scott and
Ranking Member Thompson, for holding this hearing today, and
thank you to Chairman Behnam for being here.
The CFTC has long been under-funded. Since your
confirmation as chair in January, have you been able to
evaluate whether the CFTC has adequate staffing and resources
to effectively carry out its responsibilities?
Mr. Behnam. Thank you, Congresswoman. That is certainly
something I do on a regular basis working with our CFO and our
folks in the budget office, working with appropriators as well.
I would say that what I have observed even in the past few
years, let alone nearly 5 that I have been at the Commission as
both a Commissioner and chair is that our markets continue to
grow, we continue to see a larger pool of participants and
registrants, and with that comes a larger responsibility for us
to interact with the agency constituency and also new
participants. So I do think we will need an increased budget to
deal with all of these issues in the digital asset space,
obviously in our core markets, but it is increasingly becoming
a challenge to deal with these issues and protect markets.
Ms. Brown. Okay. So you touched on a few things. What more
can Congress do to support the agency?
Mr. Behnam. Well, I think from an authorities' perspective
we do have the authority we need over our traditional markets.
I have publicly stated and I know Ranking Member Thompson has
talked about digital asset authority, and I fully support that.
But in terms of my direct engagement with Congress and ask is
to continue to think about our funding levels. We fell a little
bit short this past fiscal year, but looking forward, we will
be asking for a little bit more. And that is a direct result of
the interaction we are having with an increasingly large pool
of market participants and increasingly large responsibility we
have over growing markets.
Ms. Brown. Thank you for that. In your testimony, you
highlighted the agency's commitment to responsible innovation
and fair competition among market participants. With the rapid
growth of digital assets over the last several years, many of
the barriers to entry to the finance industry have been
reduced. How is CFTC responding to a more diverse market
participation?
Mr. Behnam. Thanks, Congresswoman. It is a great question,
we are in fact seeing that in our markets. Barriers are being
eliminated because of technology, and there is more retail
participation in our markets, which I think is overall a
positive thing, but it does come with a great responsibility.
And that responsibility as a regulator is to ensure customer
protections are in place, to ensure disclosures and information
flow is fair and equitable across all income levels and
investor education levels. And we are currently working within
our groups, most notably, the Market Participants Division and
the Office of Customer Education to do extensive outreach,
inclusive outreach, and really, as I was saying earlier, to
touch parts of our country and our market that we historically
have not touched. And I think it is really important because,
as we all use our phone and download apps and have access to
any number of things much easier than we did even a few years
ago, the same is the case for financial markets. And we need to
assume that will only increase over time. But with that comes a
great responsibility, so that will be a priority of ours to
work with communities that we historically have not touched or
engaged with and make sure they know about the risks and
opportunities of new technology so that they can make the most
informed decisions for their wallet and their household.
Ms. Brown. All right, thank you. And thank you, Mr.
Chairman. With that, I yield back.
The Chairman. Thank you. And now the gentleman from
California, Mr. LaMalfa, is recognized for 5 minutes.
Mr. LaMalfa. Well, thank you, Mr. Chairman. I just wanted
to weigh in a little bit more on the issue with how the futures
would be affected with what we are really looking at with the
Ukrainian market for as much crops as they grow and how much
they are a part of the world markets in exports and tying that
back into derivatives. So how can derivative markets help to
address the imbalances that we are going to see with so much in
certainty in that portion of the market, as well as my home
state where water is being cut off to farms? I think a number
we don't know quite yet, but we could see 70 percent of
irrigated acres in California cut off from water partly because
of drought but a lot of it is because of manmade drought with
mismanagement of water and it being devoted towards
environmental purposes and fish habitat, things like that. So
what kind of disruptions do we expect for these commodities,
and how do derivatives help to balance that out?
Mr. Behnam. Thanks, Congressman. And I know you know this,
but just to be clear, we are price-agnostic. We do not set
prices on markets. They serve two main purposes, risk
management and price discovery. So in response to your
question, the two purposes and the two benefits of our markets
as we are dealing with these crises both internationally and,
as you say, domestically as a result of any number of issues is
to help producers, to help users, utilities, anyone who has to
have commodities as a part of their business or their
operations is to see both price discovery and anticipate risks,
challenges, and costs that may come in the future but then
ultimately risk management. And that is to be able to hedge
risks going out if not months, years so that they can have
steady, stable prices and know what they are going to have to
be able to pay for costs--inputs on the input side but also
charge customers.
So this has been the purpose and the use of derivatives for
decades. It will continue to be that. I think from a CFTC
perspective our main goal is to ensure that markets are fair,
transparent, orderly, and free from fraud and manipulation and
are properly reflecting the dynamics of supply and demand.
Obviously, those dynamics change significantly with weather,
with geopolitical issues, with socioeconomic issues, but we
just need to make sure that all of those factors are at their
core being treated fairly and that we don't have fraud and
manipulation influencing prices at all.
Mr. LaMalfa. So bottom line, do derivatives markets help to
balance and cushion some of that uncertainty?
Mr. Behnam. Absolutely.
Mr. LaMalfa. Yes, okay, thank you. Also, Chairman Behnam,
is there--on the CFTC, this question may have been asked. I
couldn't hear it earlier. How is CFTC being staffed out at this
point in return to work? Are we going to be able to expect
normal service and operations are underway or soon underway so
good work can be done, an expectation basically for the
customers after the last 2 years?
Mr. Behnam. Thank you, Congressman. We are in the process
of transitioning back to the office. I myself and my staff
around me have been back in the office since last fall. And I
think my goal is to just make the process orderly and be
cautious, understanding that folks have both gotten accustomed
but returning to work will take time, but my goal is to get
folks back into the office as soon as possible. There are a
number of issues that we are going to need to deal with in
terms of negotiations and getting folks comfortable, but
hopefully as soon as possible we will be back at the office
with an understanding that things have changed and that by and
large we were able to accomplish our short-term goals and
mission while we were remote, but there are also important
longer-term issues that we have to deal with as an agency, the
culture of the agency, and the health of the agency in the
years ahead, and those are things that I think about as we
think about a post-pandemic work environment to ensure that the
agency is healthy, we are recruiting, we are retaining, and
that there is a long-term, successful story for the CFTC to
tell and ultimately, as you pointed out, we are doing our job
serving the customers we have and also the American taxpayers
who are hard at work and we owe it to them to make sure markets
are fair, resilient, transparent, and not causing risks that
should not be happening.
Mr. LaMalfa. And open, yes, it is high time we get back
rolling again, as we are suffering economically. And so I
appreciate it. Well, my time is up. I will yield back.
The Chairman. The gentleman from Illinois, Mr. Rush, is
recognized for 5 minutes.
Mr. Rush. Well, I want to thank you, Mr. Chairman, for this
outstanding hearing. My question is directed to Chairman
Behnam. Chairman Behnam, in your testimony you briefly
mentioned new and existing policies to fortify the CFTC's
markets against cyber attacks. Can you provide a brief
orientation on the existing policies, as well as the new
proposals that you would recommend to fully protect our markets
from cyber attacks?
Mr. Behnam. Thank you, Congressman. It is an extremely
important question. Right now, we have a policy within our core
principles that relates to systems safeguards. And within
systems safeguards, our examiners, most notably with
clearinghouses, do annual examinations for the systemically
important clearinghouses and ad hoc examinations for the non-
systemically important clearinghouses. But within those systems
safeguards, we analyze cybersecurity issues, information
security issues, and business resiliency issues, among others.
Those are the core responsibilities we have with an
examinations process.
As we have seen an increase in cyber attacks as a result of
the Ukraine crisis but just generally across the globe, I think
it is extremely important, as you point out, that we increase
our resiliency, that we increase the questions we are asking,
the intersection and the engagement that we have with our
market participants, going beyond the clearinghouses, talking
to the FCMs, the futures commissions merchants, the swap
dealers. Any market participant that could be a point of access
for a cyber attack and have a cascading effect across our
markets and potentially all financial markets. So we are
currently in the process of thinking how we can examine that
existing suite of examinations that we have right now that are
in statute and certainly look forward to working with you if
you have any ideas that we can consider. But it is an extremely
important issue, that puts our markets at risk, and something
that we all have to collectively think about very hard.
Mr. Rush. Is there any role that you would ask the Congress
to play in terms of helping you to fully engage and fully
develop protections for our markets?
Mr. Behnam. Congressman, I think in terms of authority, we
have the authority we need. I would say there is one point I
will mention, and it has to do with vendor risk or third-party
service providers. This is something that market regulators
typically do not have. So you can imagine we have direct
intersection and a relationship with our registrants, but
often, the registrants are outsourcing or dealing with vendors
on the backside of their relationship with us. We certainly
trust our registrants and know that they are doing what is in
the best interest of their own business, but I think there may
be something to consider there in terms of our relationship
with vendors and third-party service providers.
The other thing I will mention very quickly is funding.
This is becoming more complex, more costly in terms of both
personnel and the expertise they have for cyber issues, for
digital asset issues. The cost of these techniques, the
technology of both the hardware and the software is growing. It
is becoming more complex. And as I look at some of our private-
sector registrants, the amount of resources that they are
piling into technology relative to their other business
segments is just growing. And that I think has to be the same
case for us.
We are, in my view, a value-add to the American taxpayer.
We brought in over $1 billion in Fiscal Year 2021, nearly $1
billion in 2022. We are a value-add, and I think we should be
viewed as that and hopefully properly funded so that we can
build these infrastructure points on technology and protect
American markets.
Mr. Rush. Well, thank you. I have an additional question in
my remaining seconds. I am very much interested as the Chairman
of the Energy Subcommittee on the Energy and Commerce
Committee. I am interested in your Climate Risk Unit and your
recommendations related in the Climate-Related Market Risk
Subcommittee's report that was promised in September of 2020.
Can you please give me some indication of an update on these
efforts, and can you provide us with an update from the Climate
Risk Unit activities since they were created a year ago?
Mr. Behnam. Yes, thank you, Congressman. I created the
Climate Risk Unit in March of 2021. Currently, it is staffed by
about 15 to 20 staff across different divisions, and they are
in the process of coming up with a strategy. In my mind it is a
bit of a binary approach that we are going to think about what
we can do from a regulatory standpoint to create more
resilience in our markets, what we can do to support innovation
and resiliency and combat physical risk related to climate
change.
The other element is transition risk, which we all know is
a huge risk as we transition hopefully in an orderly manner to
a net-zero economy. What we can do at the CFTC engaging with
private market participants to come up with innovative ideas to
support financial markets, especially derivatives, to help
mitigate physical risk and to manage price risk. There are so
many opportunities, and we are seeing this grow exponentially
within our markets from market participants, and, from my view,
the Climate Risk Unit will do what it can to engage to
understand the price risk, but to set out an initiative and a
plan for supporting these strategies within the market. The
time standpoint we are going to look forward to the end of the
year in terms of coming out with some proposals.
The Chairman. The gentleman from Georgia, Mr. Allen, is
recognized for 5 minutes.
Mr. Allen. Thank you, Mr. Chairman. And, Mr. Chairman,
thank you for your comments regarding FTX and also Ranking
Member and also Mr. Scott and all that we have heard here
today. I would like to, rather than continue to comment on
that, associate my comments with their comments and my concern
for this.
I do have one question on that. And of course we have the
Chicago Mercantile Exchange and the Intercontinental Exchange,
which is the method we are currently using for clearinghouse,
okay, which are heavily regulated, I might add. Now, you have
FTX, which is not regulated. So I just want to make sure that
when all this comes to be, that it is a fair playing field for
everybody. In other words, I am sure that CME and ICE are both
innovating and doing what they can to do more with less people
and to provide the greatest return but under the current
regulatory environment. But can you comment on the fact that,
hey, we are going to have a fair playing field here for
everybody at the end of the day?
Mr. Behnam. Congressman, 100 percent. I am legally
obligated and I think it is fair that everyone get a fair shake
and that everyone play from the same field. It is extremely
important. It is something I have stood by as long as I have
been at the Commission, and especially within this particular
instance that you raise, FTX, we will make sure that the rules
apply fairly and equitably to every stakeholder.
Mr. Allen. Good. And I appreciate that. Thank you very
much. Now going back to your role in--we have already talked
about it extensively--your role as far as the economy. And,
frankly, the dashboard is a little scary right now. Inflation,
government debt, the Fed basically has no tools in the box. I
mean, it is either shut the economy down into a recession like
we saw in the 1970s and interest rates like we saw in the 1970s
or continue putting money into this money supply, which is
causing--I mean, you got the perfect recipe for inflation out
here right now.
And it is all driven by this war on fossil fuel. Fossil
fuel is in everything. I mean, right now there is a huge
shortage. The big problem in Ukraine and Europe is the shortage
of diesel fuel. Farmers aren't going to be able to plant. We
are going to have famine in this world. And we can't help them
because we are at 50 percent of production that we were just 3
years ago. We can't sustain this.
So what role is your organization playing in this whole
economic situation to get this dashboard back in the way it
should look as far as reasonable inflation, reducing government
debt, reducing government spending, everything that is
contributing to this economic downfall?
Mr. Behnam. Thanks, Congressman. Obviously, an extremely
important question given all that we are dealing with in the
markets today both domestically and internationally. As you
know, we are at the agency price-agnostic. We don't set prices
whether it is on treasuries or corn and soybeans or oil and
natural gas. But from my perspective our number one
responsibility is to ensure that our markets are operating
fairly, in an orderly fashion, and free from fraud and
manipulation. If they are in fact doing that--and I am
confident they are--then our market participants, whether it is
within the government official sector or private market
participants, are able to use our markets for price discovery
and hedging. And those become extremely important tools for our
farmers----
Mr. Allen. But you have an obligation to investors, okay,
or to those agencies, the clearinghouses. And it is subject to
economic dashboard indicators. Certainly, what would be your
advice to this Administration right now to deal with the risk
of what we are running here? I mean, we don't want to go back
to 2008 where we had the mortgage-backed securities issue. We
know we have bubbles out there, but you are part of the team.
You have an area, territory to protect. I mean, what are you
doing to look at the big picture and say, hey, we can't sustain
this?
Mr. Behnam. Congressman, I participate within the Financial
Stability Oversight Council. I frequently talk with my
colleagues across the government and other regulators. I would
say this, that what we have faced in the past 2 years is
unprecedented, right, with the once-in-a-century pandemic and
the economic response to that where we had a supply shock, a
demand shock, and then the recovery over several months,
followed by now the crisis in Ukraine and given the importance
from a commodity perspective of both Russia and Ukraine in ag
and energy.
So I do think collectively we are doing everything we can
the best we can, understanding the dynamics of the American
consumer, under the dynamics of supply restraints, and
understanding the very quick pivot towards a return to normal
in terms of demand but a much slower supply because of labor
issues and supply issues.
Mr. Allen. Okay.
Mr. Behnam. So it is a challenging issue. We are looking
into it. We look at the data, and we try to be data-driven, but
it is a process and it is going to take time. And I am hopeful
of the path that we are on----
Mr. Allen. We don't have a lot of time. This thing is
getting serious. Thank you, and I yield back.
The Chairman. The gentlewoman from New Hampshire, Ms.
Kuster, is now recognized for 5 minutes.
Ms. Kuster. Thank you, Chairman Scott, and welcome to the
Agriculture Committee, Chairman Behnam. We appreciate you being
here, and I would agree with you these are unprecedented times,
so I appreciate your leadership.
In the nearly half-century since Congress established the
Commodity Futures Trading Commission, it has evolved to tackle
a wide swath of financial commodities beyond just its roots in
agriculture. As CFTC's mission continues to grow alongside new
markets, including digital and crypto assets, it is imperative
for this Committee to understand what you will need from
Congress to be successful.
So speaking of digital assets, Mr. Chairman, I know you
have noted previously the digital asset market is unique in
that it is largely a retail market. What are some of the core
customer protections that would be needed in a regulatory
framework for the digital asset market, and are there core
principles in the Commodity Exchange Act that can be applied
here to protect consumers?
Mr. Behnam. Thank you, Congresswoman. It is a very
important question and in many respects--and I have said this
in the past--market structure can be very similar despite
assets that are traded on those markets being different. So
what I mean whether it is an equity security or fixed income
product or a derivative. And our core principles obviously are
driven from the derivatives standpoint, mostly commodities,
obviously anything from financials and agriculture and energy
commodities. But as we think about digital assets and the
potential regulatory structure being built around digital
assets, I think it is important to use many of the market
structure principles and the core principles as you know as the
building blocks for what might become a regulatory market
structure.
From a customer protections standpoint, it is all about
segregation of assets, which becomes very, very difficult
within digital assets. It is something we are working on very
hard because it is so unique from traditional assets. Execution
and settlement, these are core elements of a trade from order
to settlement that we have to be thinking about collectively
with your help and support so that we can ensure customers know
what they are doing as they are trying to execute trades or get
exposure to digital assets but also feel comfortable both from
an intermediary standpoint potentially or an exchanges
standpoint and the regulator's standpoint that we are doing
everything we can and fulfilling our responsibility to know
that their assets are being protected and that if something
happens, that there will be individuals that are held
accountable.
Ms. Kuster. Great. That is reassuring. So I know there have
also been significant discussion about FTX's recent proposal to
amend the registration as a derivatives clearing organization
and that the Commission presently put that proposal out for
public comment. Mr. Chairman, the Treasury Department has been
tasked with the leadership role in the development of a digital
asset regulatory regime. I wonder if you have consulted with
Secretary Yellen on this proposal?
Mr. Behnam. Thank you, Congresswoman. I have not directly
spoken with Secretary Yellen about it. I know my staff has
spoken with a number of the other agencies about the proposal.
There is a distinction between some of the efforts started by
President Biden in the Executive Order and what the FTX order
is currently proposing. The FTX order, there are listed
derivatives, contracts on Bitcoin and Ether on an FTX exchange
currently that are trading and have been trading for a number
of years. What the proposal is doing is it is requesting to
amend the existing order that contemplates those derivatives,
those futures contracts, and changing the market structure. So
as much as there is some relationship between what is going on
within the U.S. Government and President Biden's Executive
Order, there is a separation that I think is certainly unique
to the CFTC because it is explicitly focused on derivatives and
futures and not anything else.
Ms. Kuster. Okay. Great. I have limited time, but just
briefly, switching gears, I am also interested, as my colleague
Mr. Rush addressed, climate change and trying to minimize
climate-related risk to our financial system. And you have
talked about the Climate Risk Unit and the Climate-Related
Market Risk Subcommittee. Is there anything that you would want
to add to elaborate on your vision for the Climate Risk Unit
during your tenure and how they can identify sensible reforms
within the Commission's regulatory framework? And I have 10
seconds left.
Mr. Behnam. Thank you, Congresswoman.
Yes, they are in the process of working on exactly what you
said, and I am hopeful by the year's end we are going to come
out with some thoughtful proposals that the Commission can
consider to build more resilient markets against climate
change.
Ms. Kuster. Great. Well, we would love to hear about it on
our Committee. And with that, I will yield back, Mr. Chairman.
Thank you.
The Chairman. Thank you. And now the gentleman from
Illinois, Mr. Davis, you are recognized for 5 minutes.
Mr. Davis. Thank you, Chairman Scott, Ranking Member
Thompson, for holding this hearing to discuss the state of the
CFTC and how we as Members of Congress can support its core
principles.
Along with many of my colleagues here today, I am concerned
about the state of our economy due to the Biden pro-spending,
pro-inflation agenda that only looks to be gearing up to get
worse for our constituents under the President's new ``build
back broke'' budget. The impact that the new CFTC rules and
regulations may have on market participants and ultimately our
farmers, our ranchers, and our constituents who rely on the
commodities and contracts that are being traded is something I
am very concerned about and I hope the Commission is carefully
reviewing.
The CFTC's risk management requirements embedded in its
core principles provide market participants with several layers
of safeguards to ensure that risk is properly managed,
customers are protected, and the markets that are so critical
to our food and our energy supply, they remain stable. I am
very concerned about this as we look at the challenges these
markets have faced over the last few years and are likely to
continue to face as global events drive commodity price
volatility, which I am sure that many of my colleagues in front
of me have addressed with you.
But my question for you, Chairman Behnam, regarding the
idea of a direct-to-customer non-intermediated derivatives
clearing model, how would this work with the CFTC's risk
management standards that are built around an intermediated
clearing model?
Mr. Behnam. Thanks, Congressman. You are right that the
standards in some respect are built around an intermediated
model, but they don't require an intermediated model. And I
think given technological advancements in our ability to access
markets--and I mentioned this earlier thinking back decades
when farmers and producers had to call up an associated person,
an introducing broker, and then get an order out to the Chicago
Board of Trade, those lines can all be reduced now because of
technology. And I think what the proposal is trying to do in a
non-intermediated model is to take advantage of technology so
that we can break down some of these silos and have more direct
access.
I am not supporting it at all. I think what my
responsibility is, is to look at the proposal. I said this
earlier. Section 5 [7 U.S.C.] requires me to support
responsible innovation. And there is a possibility that this
idea, if responsible and if it meets our core principles, can
be a next step in market structure.
Mr. Davis. Do these standards need to be formally updated
to account for the differences in these models, and do you guys
at the CFTC intend to do this?
Mr. Behnam. I don't think standards need to change. We are
a principles-based regulator, as you point out, so when you
think about principles-based, we largely look at outcomes and
not necessarily a check-the-box routine of how we get to the
outcome. And that in fact gives us the flexibility we need to
support innovation in the market. So as long as we are looking
at risk assessments, margin methodologies, and how market
structure functions, if the math is done--I often use that
phrase--and we feel comfortable within the sort of sphere of
what the proposal is, I don't think we necessarily need to
change any rules.
Mr. Davis. Okay. But should this model be allowed to go
forward before the Commission decides what rules or standards
should be in place? Shouldn't there be clear rules of the road?
Mr. Behnam. So we have not allowed the model to be rolled
out. We are in the process of having a public comment period. I
said earlier my intention is to have a staff roundtable on non-
intermediated market structure. We are going to be deliberate,
we are going to be cautious, we are going to engage with you
and others to make sure that we are thinking about the risks
and opportunities before we approve or disapprove anything. I
think it is my responsibility to engage fair and equitably with
all stakeholders and ensure that we are doing what our job is
as the CFTC.
Mr. Davis. Well, Chairman, I do want to ask if, in your
exchange with Mr. Crawford, you noted the value of having a
statutory definition of digital commodity. One additional
challenge with that is who gets to interpret that definition.
Today, the SEC has the first crack at determining what assets
are securities. If we define digital commodities and provide
the CFTC jurisdiction over these assets, should the CFTC be in
a similar position of having first crack at what defining a
digital commodity is?
Mr. Behnam. Yes.
Mr. Davis. Thank you. I yield back.
The Chairman. Thank you. And now the gentleman from
Arizona, Mr. O'Halleran, you are recognized for 5 minutes.
Mr. O'Halleran. Thank you, Chairman Scott and Ranking
Member Thompson, for organizing this important hearing today. I
also want to thank Chairman Behnam for working with us to
advance the CFTC's mission of promoting integrity and
resilience in the derivatives markets.
Mr. Chairman, I listened to your opening remarks today, and
it brought me back to a little bit of my memory of history.
While you were working on those issues, I was, too. I was on
the Board of Trade's board of directors for a number of years
back when those European issues were being brought up first.
And I am thankful that you were on that process also.
But right now, climate change poses a systemic thread to
our financial system. The challenges we face right now are
undeniably real and urgent and right now we do not exactly have
the tools to work on those in the way we need to.
Climate change-related risks can be sudden and physical
like wildfires and flooding, which cause acute shocks to the
system and sharp increases in economic damages, more and more
so it seems with each year. Those of us in northern and eastern
Arizona are certainly aware of these challenges, as we have
seen increasingly deadly wildfires coupled with post-fire
flooding. The risk can also be chaotic and subtle like rising
temperatures and persistent drought.
Economically, these gradual changes can affect insurance
and mortgage markets, loans, crop yields, and home values. We
are seeing these impacts right now in Pinal County, Arizona,
where farmers are forced to let farmland lay fallow due to
water use restrictions.
I guess the main piece here for me is that this is a
connected environment on the business side of the environment,
it is on the family side of the environment, the economic side
of the entire country and the world, and we need to be able to
have the tools necessary to address those both in the
marketplace and in the field.
Additionally, there is economic risk in transitioning too
quickly to net-zero, which could harm smaller companies that
don't have the resources to adapt as easily as their larger
competitors or counterparts.
Now, Chairman, I was pleased to see you established the
Climate Risk Unit last year to strategically address the
climate risk in the derivatives markets. Now, can you please
provide an update on how the Climate Risk Unit has spent the
past year and what you see as the unit's next step in
addressing the climate threat? How will the Climate Risk Unit
help farmers, ranchers, and constituents in Arizona manage the
increasing risk climate change poses to their livelihoods?
Mr. Behnam. Thanks, Congressman, I appreciate the question.
And, as you noted, I formed the Climate Risk Unit in March of
2021 with the intent of essentially collecting certain experts
within the agency across divisions so that we could
collectively think about what the agency could do from a
regulatory standpoint to both engage with stakeholders,
including agricultural stakeholders, and essentially supporting
innovation in our markets to tackle both physical risk
associated with climate change and, as you point out, the
transition risk associated with climate change.
Derivatives markets are inherently risk management
agencies, so I think this is natural to us. But as you point
out, the increasing risks of climate change that we are seeing
across the country and the globe are going to affect farmers,
ranchers, manufacturers, and we need to address those issues as
soon as possible. So my hope is by the end of this calendar
year we are going to have as a first step a proposal of ideas,
regulatory, to bring before the Commission, and certainly
welcome sharing them with you so that you can give us your
input if you would like.
Mr. O'Halleran. I remember a time when we were trading
grains in Chicago and when it rained on South Street, there was
no drought in America because all of a sudden people would
trade a little bit differently because all the sudden rain is
coming down. That is not true anymore. That wasn't true then.
But now, the reality is we have to be much more aware of what
is going on throughout the world in climate. It is having a
profound impact.
And while I have a couple of seconds left here, I just want
to say my concerns for the CFTC are the same today as they were
before. I do not feel that you have enough personnel or budget
to be able to address the many issues that you are facing and
will be facing, and that includes the Bitcoin and all the other
factors that go into that. And I will look forward to talking
with you on those issues. Thank you.
The Chairman. And thank you, Mr. O'Halleran. And now the
gentleman from South Dakota, Mr. Johnson, is now recognized for
5 minutes.
Mr. Johnson. Thank you very much, sir. And, Mr. Chairman, I
would be remiss if I didn't start by talking about my friend
Summer Mersinger. She and I grew up just 30 miles away from one
another, and I have known her for a long time. And I am sure
you would agree with me, sir, that she is exceptionally well-
qualified to serve with you on the CFTC, incredible integrity,
incredible prudence. She is going to be very much a value add
as you altogether pursue your risk management and price
discovery missions. So please greet her warmly for me when you
see her next, sir, if you would.
Mr. Behnam. Absolutely. And I agree with you
wholeheartedly.
Mr. Johnson. Yes. And when I want to be famous in D.C., I
tell people I know Summer. That is what a big deal she is in
this town.
So, anyway, I want to talk with you a little bit about
equivalency, sir. In the immediate aftermath of Brexit we spoke
a lot with your predecessor about clearinghouse equivalency,
European Union, cross-border access. I mean, talk to me a
little about where we are at today on those issues.
Mr. Behnam. Thanks, Congressman, it is an extremely
important question. And I would say from an EU perspective we
are in good position. We had obviously a number of challenges,
but thanks to you and this Committee, as the Chairman pointed
out, and a number of the Members, given your incredibly strong
input over the past few years, we are in a good place with the
European Union. We have a well-established relationship under
an MOU, and we have preserved the primacy as the CFTC as the
home country regulator for our registrants, including CCPs.
That said, there are always more issues out there. Brexit
was not a one-incident event. We continue to see repercussions
because of Brexit, and they will exist for a number of years,
going forward. So we are currently in communication with a
number of regulators, including those of the UK, as they
contemplate their life post-Brexit and ensuring that we build
off of that strong, long-lasting relationship between the
United States and the UK and ultimately, as I point out and I
know you believe, preserving the primacy of the U.S. regulator,
specifically here the CFTC, over our domestic CCPs.
And, as Chairman, I will continue to make those arguments
strongly to ensure folks understand the well-established rules
and regulations we have and the great financial markets that we
steward and certainly welcome your support but also we will
keep you up-to-date as those developments and discussions go
along.
Mr. Johnson. So it sounds to me, Mr. Chairman, that things
have gone about as well as they could have. And obviously, your
team at CFTC deserves a lot of credit for that. There was
tremendous uncertainty a couple of years ago about whether or
not we would end up in this spot. And of course, you are right,
it is an ongoing challenge. There is still work to be done, but
we are sitting about as well as could be expected. Is that
right?
Mr. Behnam. I think that is fair to say, but I would never
rest on my laurels because I do think there are a number of
issues out there that I am trying to catch them early so they
don't become an issue, that they don't raise to the level of
this Committee and we continue to have staff-level
conversations, I continue to have conversations with my
counterparts over in the UK and other jurisdictions to ensure
that what happened in the EU a few years ago does not happen
again and that no one gets ideas about what they can or think
they should do because of some regulatory shift or some market
shift. So we are going to keep sending that message very
clearly across the globe, and I will do my part as best I can,
and I am hopeful that I will be successful. But if things
change, I will certainly report back to you.
Mr. Johnson. So how about from the perspective of the
United Kingdom? Of course, that is not your job nor mine, but
have they also been able to secure a good landing spot in the
wake of Brexit?
Mr. Behnam. It is a good question, and you are right
because it wasn't just the EU who suffered or who had an
outcome as a result of Brexit. It was the UK of course as well.
And as the EU was starting to think about what they were going
to do from a regulatory perspective, perhaps the UK was just a
little bit behind. But we are having those conversations right
now. I am confident that we are having conversations that are
heading in the right direction. And what I mean by that is
preserving U.S. primacy, preserving primacy of the CFTC as the
home country regulator, leaning on the existing relationship
between the CFTC and my counterpart agency, and, above all
else, using the foundational relationship between the United
States of America and the United Kingdom, allowing them to
trust us and the regulations we have and the institutions that
we have and supervise as much as we need to trust them and the
supervision that they conduct over their institutions. So I am
going to lean on those principles and ensure they are
successful.
Mr. Johnson. Let me [inaudible]--probably more valuable
than the question I was asking. And I am out of time, so if
your team can follow up afterward.
Mr. Behnam. Thank you.
Mr. Johnson. I guess I was asking more about whether or not
the European Union and their regulatory agreements with the
United Kingdom is going to allow the United Kingdom the
flexibility they need to also maintain how they operate because
I just think there could be a broader impact on global markets
if there are disruptions in that relationship. But thank you
very much. And sir, I yield back.
The Chairman. And Chairman Behnam, feel free to respond in
writing to Mr. Johnson's questions.
[The information referred to is located on p. 47.]
Mr. Behnam. Sure. I apologize, Congressman, for not
directly answering the question. But----
The Chairman. He is one of our very strong, bright Members,
and you can respond in writing. We want to get to as many
Members.
The gentleman from California, Mr. Carbajal, is now
recognized for 5 minutes.
Mr. Carbajal. Thank you, Mr. Chairman. Chairman Behnam,
thank you for testifying before us today.
California knows the effects of climate change well. We
consistently experience severe drought and intense wildfires
that threaten the future of all crops, not just commodity
crops. I think you are right that the CFTC has a role to play
in addressing climate change. I applaud you for the creation of
the Climate Risk Unit to focus on mitigating climate-related
risks. Climate change is not a new and emerging risk. Climate
change has been here, but we have been late to act on it.
Chairman Behnam, can you walk me through what role the CFTC
can play in helping foster investments to promote a smooth
transition to renewable energy sources? And what are some
challenges you see with renewable energies competing against
oil and gas futures?
Mr. Behnam. Thanks, Congressman. It is extremely important
to have risk-management markets and price discovery markets,
and I think we have seen that. Our markets date back over 150
years and in many respects have been a building block and a
foundation for the success of the American economy for decades.
And I don't think that is any different now as we think about
transition to a net-zero economy.
So as Chairman, and as you pointed out, forming the Climate
Risk Unit, my goals are going to be to engage with market
participants, with stakeholders, with innovators so that our
markets can continue to serve that purpose, that we can see
innovation in a product development space so that folks, as
they are transitioning to renewables or transitioning their
companies to a net-zero environment, they can lean on our
markets to manage the risks that are going to come along that
way because, as you point out, there will be many risks, it
will be difficult, but we need to continue to push forward in
that transition in an orderly way to ensure resilience against
climate change.
There are certainly many issues, and we are dealing with
them now in terms of the Ukraine crisis, but I do think it is
incumbent to be balanced, to be fair, and to move the
transition forward but understanding that transition risk is
real and that we are going to have to in many respects think
about issues and challenges on a daily basis and understand
that we are going to need to lean on fossil fuels for a number
of years, hopefully in a downward trajectory. But in order to
power America as we transition to renewables, we are going to
need to lean on those existing energy sources to get to where
we need to get in 2030, 2040, and 2050. So I am hopeful that
our markets will continue to manage and support a transition in
an orderly way and allow producers, manufacturers to use our
market to eliminate that price risk and eliminate those
externalities which we will all face as we deal with climate
change and those risks in the years ahead.
Mr. Carbajal. Thank you. In the CFTC report, Managing
Climate Risks in the U.S. Financial Systems, one of the
recommendations made is requiring credit-rating agencies to
disclose the extent to which their ratings take into account
climate risk. Can you elaborate on what you think this system
might look like and do you think this approach will encourage
climate-friendly business practices?
Mr. Behnam. Thank you, Congressman. I do want to just
clarify that report, which I am very proud of, but it was an
advisory committee so it was not a product of the Commission,
per se. I did convene a number of market participants to put
together the report and make recommendations, which were
exhaustive in scope and very helpful and I think a
steppingstone for what we are seeing in the Biden
Administration.
With respect to that particular recommendation, when I
think about that recommendation, it makes me think about the
financial crisis and the important role of credit-rating
agencies and ensuring that they are transparent, that they are
fair, and that they are transmitting information as clearly as
possible to end-users. And in this case this is often
investors, whether it is local governments, pension funds, or
individual investors.
So as we start to see the growing risks related to climate
change, whether it is flood or fire or any number of other
issues, these are going to impact local communities, these are
going to impact states and ultimately the United States. And I
think as the investing community needs to know, we need to know
what these risks are so that we can allocate capital
efficiently, appropriately, and as best informed as possible.
Mr. Carbajal. Thank you. Mr. Chairman, I yield back.
The Chairman. Now the gentleman from Ohio, Mr. Balderson,
is now recognized for 5 minutes.
Mr. Balderson. Thank you, Mr. Chairman, both Chairmen.
Thank you, Mr. Chairman, for testifying today. And you
discussed in your testimony the importance of cybersecurity at
the CFTC. As I am sure you know, a 2020 audit by the Office of
the Inspector General spelled out recommendations for the CFTC
to follow in order to mitigate cybersecurity risk for
registrants. What progress have the Divisions of Market
Oversight and Clearing and Risk made on implementing the
Inspector General's recommendations?
Mr. Behnam. Congressman, thanks for the question. It was a
very serious and important recommendation. We obviously take
those very seriously across the board but particularly within
the context of cybersecurity, as I pointed out. And you
certainly recognized we are on heightened alert across the
board given what we are dealing with, with the Ukraine crisis.
But cybersecurity becomes an even more critical issue to
address.
So with those recommendations, we are currently in the
process of making possible changes so that we can improve our
systems, become more resilient across the agency, and
ultimately send a message to our constituents and our market
participants that we are as fortified as possible in protecting
the markets that we are asked to serve and do.
Mr. Balderson. All right, thank you. But following up on
that, Mr. Chairman, what resources do the CFTC require from
Congress to fully implement the Inspector General's
recommendations and to further alleviate any additional
cybersecurity risk?
Mr. Behnam. From an authorization standpoint, I don't think
we need additional authority. I have said this before and I
will repeat it. Given the risks associated with cybersecurity,
given the resource challenges both on the personnel side, on
the technology hardware side and the technology software side,
I am just seeing an increased need for resources to hire the
right individuals, retain the right individuals, and further
improve our resiliency from a cybersecurity standpoint.
We can never keep pace with the private-sector, I
understand that. We have a duty to be careful with the
privilege we have to serve and the resources we get from the
American taxpayer, but I do think net-net we are a value-add
given the penalties we impose and the protections that we bring
to market. And because of that, I think it is important that we
continue to invest in the CFTC, especially on the technology
side so we can build this resilience and not leave American
financial markets vulnerable to cyber attacks.
Mr. Balderson. All right. Thank you. And we will stick with
cybersecurity. As we move forward--and I may run out of time,
but I will ask this question and you can report back to our
office. Obviously, your staff can follow up. But are you aware
when an individual buys a digital asset, an asset secured by
whichever platform they used to make the purchase, this means
that different platforms can be more secure than others and
could be vulnerable to cyber attacks. Would it be beneficial to
create some sort of framework to ensure that digital assets are
secure across whichever platform consumers choose to use? And
the follow-up on that, is this something that is being
discussed at the CFTC or within interagency working groups?
Mr. Behnam. Cybersecurity is a significant portion and
discussion point among the larger effort of the relevant
financial regulators in the Treasury Department. We understand
and I understand very clearly that within the context of
digital assets as we are approaching and understanding and
learning about the technology that is the foundation of a
digital asset ecosystem, that cyber becomes a significant risk.
And we are seeing that even I think a few days ago there was
another cyber attack, which led to about $600 million of stolen
digital assets.
This will continue, and this in my mind is just another
argument for a strong, thoughtful, very proactive regulatory
structure around the digital asset space and for me personally,
as Chairman of the CFTC, ensuring we have the right tools, that
we are thinking about cyber risks specific to the digital asset
space as it may be distinguishable from traditional finance,
learning and understanding those new elements of it, and
addressing them as best that we can.
Mr. Balderson. Mr. Chairman, well done. Thank you very much
for those answers. And Mr. Chairman of the Committee, I yield
back my remaining time.
The Chairman. Thank you. And now the gentlewoman from
Washington, Ms. Schrier, is recognized for 5 minutes.
Ms. Schrier. Thank you, Mr. Chairman. And welcome, Chairman
Behnam. I would like to focus on the many uncertainties that
our farmers are facing and how the CFTC can help.
Supply chain dysfunction made worse by the pandemic was
first brought to my attention by hay and wheat growers in my
district back in early 2020. And since then, I have been in
frequent communication with growers and exporters around
Washington's Eighth District about the issues that they are
facing.
Costs and the availability of transportation for both
domestic and export markets continue to be a big challenge for
wheat, cherry, apple, pear, and hay growers in my district. For
example, some growers have said that the cost for a truck to
the East Coast has more than doubled in the last year. Others
say that the cost to move fruit to the port to be loaded for
export costs as much as the entire trip to the destination
country did in previous years.
And, as you know, Chairman Behnam, we are experiencing
unprecedented market volatility with severe weather events,
trade disagreements, a pandemic, and supply chain issues
disrupting normal operations. I have been hearing from growers
in my district about the challenges of getting their crops to
overseas markets due to supply chain disruption and also due to
really exploitative practices of foreign-owned shipping
companies. And now in recent months I am hearing about supply
chain on the other side with the rising cost of inputs like
fertilizer as a result of similar struggles.
And so I am concerned about what that means for our farms
who have utilized the derivatives market to control price risk.
So if I could take wheat, for example, Washington State
produces close to \1/2\ of the nation's soft white wheat, and I
would like to know what mechanisms are in place to protect
these wheat growers participating in these markets to help them
hedge and manage their risk.
Mr. Behnam. Thank you, Congresswoman. I often say about the
CFTC, and I think I may have said earlier, we were once part of
USDA. We were once a part of the farm bill, our
reauthorization. And, as the Chairman noted, we were spun off
in 1975, but that should not dismiss the fact that our core
responsibility and job I think in many respects should be
continually focused on America's farmers and ranchers.
And with that, I think about all of the tools in the
toolbox that USDA provides whether it is crop insurance or the
commodity title programs and then the futures market. And this
is what historically it has been and it needs to continue to
be, especially under my chairmanship.
So I think in terms of what we can do to address some of
the wheat growers in Washington is ensure that we are utilizing
the tools we have within the agency, whether it is consumer
education and outreach, and I would be happy to come to
Washington and speak to some of your constituents to ensure
that they know that the U.S. futures markets remain a viable,
cost-effective risk management tool, a credible and fraud-free
price discovery mechanism so that, as we see these volatile
times and whether the externality is a pandemic, a financial
crisis, and now what we are dealing with in terms of a
geopolitical crisis, that they can confidently rely on
America's futures markets and the CFTC as its primary regulator
so that they can hedge and manage that price risk in these
difficult times.
Ms. Schrier. I really appreciate your attention to that,
and I know that the wheat farmers in my district would love to
have you come and hear their stories, in particular as we look
at fires, climate, and now more volatility in the wheat market
due to the ongoing conflict in Ukraine. So I look forward to
staying in touch. I would love to host you in my district. My
wheat growers would love to meet you. And I want to thank you
and thank you, Mr. Chairman, for putting this hearing together.
I yield back.
The Chairman. Thank you. And now the gentleman from Texas,
Mr. Cloud, is now recognized for 5 minutes. Is Mr. Cloud on?
You may need to un-mute. There you go.
Mr. Cloud. Can you hear me, Mr. Chairman?
The Chairman. Yes, I hear you now. Go right ahead.
Mr. Cloud. Okay. I can hear you as well. The CFTC has five
advisory committees that were created to foster discussion and
provide recommendations to the agency. The leadership and
membership of these are drawn from industry. In 2020 the
subcommittee of the CFTC Market Risk Advisory Committee
released a draft report with proposed recommendations to
financial regulators on steps they can take to address climate-
related market risks. Because advisory committees and their
subcommittees are industry-led entities, reports that they
adopt are not agency or official government work product. Only
if they are adopted by the full committee can they become
formal recommendations for public stakeholders of the
Commission.
In the case of the MRAC, its charter requires that full
MRAC membership vote to adopt any report drafted in its name,
yet despite having two meetings after publication of the
committee report, the MRAC leadership never called for a vote
to adopt the committee report, and now the subcommittee is
inactive, according to the CFTC website. Do you know why the
MRAC membership never adopted the draft report prepared by the
subcommittee?
Mr. Behnam. Thanks, Congressman. I was the sponsor of the
MRAC. I continue to be the sponsor of the MRAC. And my
suspicion is now that we have new Commissioners, I will
probably give way to one of the new Commissioners that
sponsorship.
That report, as you pointed out, was published in September
of 2020. I mentioned earlier to one of your colleagues on the
Committee very clearly that that was not a CFTC report. That
was a product of the advisory committee only.
In terms of the vote for the final report, it was just a
sequence of events that happened that was coincidental, quite
frankly. But the report was finalized in September of 2020. The
next meeting that we had on the calendar was, I believe,
February of 2021. And by that time I had become acting Chairman
of the CFTC and decided not to raise that report up for a full
committee vote.
Mr. Cloud. Okay. Thank you. I yield back.
The Chairman. Thank you. And now we will have the gentleman
from New York, Mr. Maloney is recognized for 5 minutes. Mr.
Maloney, you may want to check your microphone.
Mr. Maloney. Thank you, Mr. Chairman.
The Chairman. Yes.
Mr. Maloney. I apologize for the difficulty.
The Chairman. No problem.
Mr. Maloney. And I thank our witness today.
I just have a couple quick questions about digital assets.
I am particularly interested in the Chairman's view of how the
principle-based regulations that CFTC imposed would work in
this context. And what similarities exist between, say, the way
CFTC is regulating in general, and the current set up of
digital asset exchanges that are not regulated currently? If
you could just talk to us about that for a minute, I would be
interested.
Mr. Behnam. Thanks, Congressman. I have said this before I
think a number of times in the past, but market structure
within the context of digital assets and the unregulated
platforms, they are regulated at the state level, which you
know certainly from a New York perspective, pre-trade
transparency and having equal, fair information flow between
exchanges and users. The exchange itself, ideally you have a
CLOB, which is a central limit order book, essentially an
orderly platform where we receive bids and asks and then post-
trade reporting, ensuring settlement, and then ultimately
custody. These are core elements and principles of any market,
whether it is an equity market or futures market. And I
personally and strongly believe that there shouldn't be
anything necessarily different in the context of digital
assets. Obviously, the custody and settlement becomes a bit
more complicated and new and novel because of the assets
themselves, but we are looking towards some of those issues and
thinking about it.
To address your first point quickly on the principles-based
regulations has been at the CFTC for about 22 years. By and
large market participants have been very supportive of it
because it allows for innovation and development that is not
too restricted by a more check-the-box exercise. I would
emphasize to you that it doesn't mean that we don't have areas
of more prescriptive rulemaking and prescriptive oversight
whether it is around data or cyber or some core requirements.
But there is a nice balance that principles-based regulation
allows markets and market participants to be flexible within
how they conduct their businesses knowing that they have to
achieve similar outcomes but also allowing for that flexibility
to support innovation, growth, and moving and evolving with
markets, as we know, evolve very quickly because of any number
of externalities.
Mr. Maloney. Yes, thank you for that. And if you could say
a word also about one of the things that I am interested in is
the equitable component in these markets. There is a Harris
Poll that suggests that 23 percent of African Americans and 17
percent of Hispanic Americans compared to only 11 percent of
White Americans own cryptocurrency. And so as we approach the
kind of consumer regulations and protections, how do we balance
the concern about those protections without suffocating the
emerging technologies and the opportunities they provide for
communities of color that have in some ways been more
interested in this market segment than the majority community?
Mr. Behnam. A great question, Congressman, and something
that I think it is important that we peel back the onion so to
speak, right, because I think the data suggests some very
positive things, potentially low-income communities and
individuals who are either historically under-banked or don't
have access to banking services, and I think we can all agree
or at least some of us can agree that this particular
technology may allow for easier access to banking services and
the transfer of assets, and that is a very positive and good
thing, especially for low-income and historically
underprivileged communities.
But I would also say that we have to be very cautious. And
you note this out, rightfully so, that as we see these markets
evolve, I can generally say that they are highly speculative
and highly retail-oriented, so we need to make sure that folks
are using at this point where the market is largely
unregulated, these services for the right reasons. And if they
are not and if they are more focused on the speculation side
and just, potentially, making money on a short-term basis, I
have a responsibility, other regulators have a responsibility
to do exhaustive and extensive outreach to individuals and
communities that we don't historically reach out to.
And I have said this earlier, but it is important that we
utilize the leverage and the tools that we have at the CFTC to
make sure people are aware of the risks, aware of the
opportunities, but protecting themselves and their livelihoods
from fraud, manipulation, and what has historically been the
same type of fraudulent schemes we have seen throughout
history, Ponzi schemes, pump-and-dumps. The asset might be
different, but the fraud is largely the same. And we need to
use that experience and that expertise to make sure we are
rooting out those bad actors and protecting these communities.
The Chairman. Thank you very much.
Mr. Maloney. Well, my time has expired. I thank the
gentleman and thank you for all your good work and for your
testimony today. I yield back, Mr. Chairman.
The Chairman. Thank you. And now the gentleman from Iowa,
Mr. Feenstra, is now recognized for his 5 minutes.
Mr. Feenstra. Thank you, Chairman Scott and Ranking Member
Thompson.
The cattle industry is very important to my district and my
state and even to my family. Iowa ranks among the highest
producers of cattle in the country, which has given me plenty
of opportunity to sit down and talk about the issues that
cattle producers feel are important. Every time I meet with
them, they always ask for true price discovery that will allow
cattle producers sufficient leverage in cash negotiations.
You mentioned in your testimony that the core purpose of
the Commodity Exchange Act is the promotion of fair competition
among Board of Trade and other markets and market
participation. What steps is the CFTC taking to monitor
transparency in the cattle cash markets to ensure fair and
correct pricing?
Mr. Behnam. Thanks, Congressman, an extremely important
question and I can say one that I have been focused on even as
a Commissioner, but I also do want to give credit to my
predecessors. There have been many challenges I think in the
evolution of technology in our markets and other components
that have contributed to some of the issues and concerns that
are being raised by livestock producers. We are very engaged
with constituencies both at the national level and the local
level. We continue to obviously utilize our authorities from an
enforcement perspective to ensure that markets are fair, free,
and transparent and free from fraud and manipulation.
Obviously, the underlying market plays a key, key role in
any futures market, so ensuring that the cash market on the
livestock side is also transparent, open, and those data feeds
that are coming into the Boards of Trade are readily available
and that those prices are reflecting what is happening in the
cash market.
So I am happy to work with you and your constituents to
ensure this. We understand how important the issue is. We did
form a livestock task force a few years ago, and I would be
certainly welcome to doing something similar in the future if
you have continuous concerns.
Mr. Feenstra. Yes. And I really appreciate that. And that
is my next question, if you have any recommendations. And you
sort of noted one. Do you have any other recommendations? I
mean, this in the Midwest is a very critical issue.
Mr. Behnam. I think a few things is, one, I can get back to
the folks who are on that task force and see if there is
anything we can do to either resurrect it or start thinking
about those issues and see if we are seeing any patterns. Two,
the Agriculture Advisory Committee is one of the advisory
committees, so perhaps we can use that advisory committee as a
venue or vehicle to convene folks and start to talk about these
issues.
Mr. Feenstra. Yes. Well, I greatly appreciate that, and I
look forward to working with you on this.
Mr. Behnam. Thank you.
Mr. Feenstra. Also in your testimony you mentioned how
COVID-19 pandemic tested the resilience of the derivatives
markets and the post-financial crisis reforms. Obviously, we
saw the Russia invasion has created a crisis surrounding wheat
production. There are other events that are shocking the
agricultural market, especially the cost of inputs, inflation
that are really hitting my producers in my district. Can you
please elaborate on how derivatives markets will help address
the market disruptions in the turbulent environment that we
have?
Mr. Behnam. Thanks, Congressman. I think as long as I feel
like I am doing my job and the agency is doing its job, markets
will remain free from fraud and manipulation, which means they
are properly reflecting supply-demand dynamics. But what that
allows producers in Iowa to hedge risk out of curve, which can
go years out and stabilize those prices and eliminate those
fluctuations that we are seeing in the short-term. So this was
the intentional purpose of the markets. This is what they have
served. I have a responsibility to make sure that they are
serving those core requirements and purposes.
And as I mentioned to some of your colleagues, I certainly
welcome the opportunity to do some outreach to your
constituents to help them feel more confident and comfortable
with our markets as another tool in the risk management
toolbox.
Mr. Feenstra. Good. Thank you. Just one final question. We
talked so much about digital currency. It looks like it is
going to cost about $100 million in your budget. That is about
\1/3\ of your budget. How do you square that up? I mean, that
is a big deal.
Mr. Behnam. Yes, look, it is not insignificant, and I take
my responsibility as a steward of taxpayer resources very
seriously. And that number that I came up with, I used an
example from the financial crisis and where our budget was
before the financial crisis and where it was after, most
notably in light of the fact that we had a huge increase in
authority over derivatives. That said, I can tell you just in
the past year we have brought in over $100 million I believe in
penalties from fraud and manipulation, so I do look at our
agency's purpose and mission in that context. If we are doing
our job, we are making sure markets are free and fair and
rooting out bad actors and making them accountable. And we are
earning our paycheck in some respects and will continue to do
that. But that is why I think there is a value potentially for
us to have this authority and protect markets and market
participants.
Mr. Feenstra. Thank you so much. Thank you, Mr. Chairman,
and I yield back.
The Chairman. Thank you. And now the gentleman from
Florida, Mr. Lawson, is recognized for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman, and thanks for having
this hearing.
Commissioner, I believe you are aware of the concerns
aluminum end-users have with aluminum prices, particularly the
application of the Midwest premium, which has increased 415
percent since implementation of the 232 cap in 2018. Can you
confirm whether your agency or any other regulatory agency has
jurisdiction authorizing statutes over spot markets? And if
not, can you share any thoughts on what the solution is to this
regulatory gap, whether my bill H.R. 2698, the APEX Act, might
be--is the right approach?
Mr. Behnam. Thanks, Congressman. We have jurisdiction over
cash markets across commodities when there is fraud and
manipulation involved. That is a statutory-authorized authority
we have. But outside of fraud and manipulation, we do not have
authority to police cash markets. We utilize that authority. We
have utilized it in digital assets and other commodities over
the years, and you can imagine the relationship between cash
and futures and the importance of having cash markets that are
free from fraud and manipulation.
In regard to the APEX Act, thank you for your support.
Thank you for your interest in this issue. Obviously, aluminum
prices have gone up very significantly in the past few years,
and a lot of inputs and externalities related to that, given
the crisis in Ukraine, some supply-chain constraints, a shoot-
up in demand and less supply, so obviously there are a number
of things driving that price.
But in terms of the APEX Act, I would say that that would
be a pretty unique authority for us to have. We don't
traditionally--and the way I view it is potentially register or
have oversight over a price-setting benchmarking agency or
entity. As we think about it, and I am happy to take a steer or
input from you--those services are voluntary, so I think we
would need to ensure that whatever authority Congress decides
to provide to the CFTC in context of benchmark providers is
that we retain that service because if it is a voluntary
service and then a regulator comes into the scheme, that
voluntary service could easily go away and then where are we
left? Potentially without a benchmark provider.
So I look forward to certainly talking to you about it
more. I think it is a very positive step. But, it would be a
unique authority for us to have, and we would have to think
really hard from a CFTC perspective what would the regulatory
outcomes be? What rulemakings would be needed to implement your
law?
Mr. Lawson. Okay, thank you. And I look forward to working
with you on that. And I want to know that in Fiscal Year 2021,
Consolidated Appropriations Act (Pub. L. 116-260) passed in
December 2020 included language directing your agency to
release a public record on aluminum pricing. Commissioner, are
you able to provide an update on how the report is progressing
and when you expect to release it?
Mr. Behnam. Thank you. We are in the process of working on
a document that we could share that obviously reserves and
preserves any confidentiality issues but understand that
request in the Appropriations Act and we will get that up to
you as soon as possible. I will have my staff reach out to
yours shortly after the hearing so that you can get a tighter
timeline and date on when that report will be provided to
Congress.
Mr. Lawson. Thank you very much, Commissioner, for being
here. And with that, Mr. Chairman, I yield back.
The Chairman. Thank you. And now the gentlelady from
Florida, Mrs. Cammack, is now recognized for 5 minutes.
Mrs. Cammack. Well, thank you, Mr. Chairman, and thank you
to Chairman Behnam for being here in front of the Committee
today. So many important topics that we want to make sure we
cover, so I am just going to jump right in.
Chairman Behnam, in your testimony to the Senate
Agriculture, Nutrition, and Forestry Committee you stated that
there is, ``a thin line that the CFTC and the SEC must navigate
when determining which agency has jurisdictional authority over
the digital asset space.'' Additionally, you clarified that 60
percent of the digital asset space marketplace falls under the
jurisdictional authority of the CFTC and that the CFTC is
prepared to assume the role of the primary regulator for
cryptocurrency and blockchain technology.
So this is a very important issue to me as the millennial
representing in Congress. This is something very important to
my peer group and a very complicated issue. I am curious as to
what your thoughts are on Congress doing legislatively to
ensure that the CFTC has spot market jurisdiction of the
digital asset marketplace and doesn't fall into the purview of
an overreaching SEC?
Mr. Behnam. Thanks, Congresswoman. You point out all the
things that I have said in the past and echo what you said
about the importance of a regulatory structure. Right now,
there is a lot of uncertainty in the market. From a CFTC
perspective, our authority is very limited to police those
markets. And as I said earlier, it is limited to fraud and
manipulation in the commodity space. And as you point out, I
think I mentioned 60 percent, and that number has stayed
relatively the same. I think the market capitalization of
digital assets tends to swing day by day. But in terms of the
value of two core digital assets, Bitcoin and Ether, that is
roughly in the 55 to 60 percent range of the total digital
asset market capitalization. And at least Bitcoin has been
determined to be a commodity by a Federal court. I think Ether
has not, but when you look at the asset itself, it looks like
and tends to be more of a commodity than a security.
I use that phrase thin line because this is really a
balancing act and something that we need, I think, to
collectively support and guidance from Congress on as to how we
are going to regulate the space, how are we going to protect
customers, how are we going to ensure market resiliency, how
are we going to prevent financial stability risks if the market
continues to grow and scale at the clip that it is.
But ultimately, and to speak to your support of the
technology, whatever outcome may exist in 10 or 20 or 30 years
with this technology, I am a firm believer that American
financial markets, both equity markets, security markets, and
derivatives market, are the best, deepest, and strongest in the
world because of our regulatory structure, because there are
clear rules of the road and bad actors are held accountable.
And I think that same logic can be applied to the digital asset
space.
I can't predict what is going to happen. I think as a
regulator we want to assume it is going to continue to grow,
and I have to protect customers in those core items about
resiliency and stability. But in terms of innovation and
development and growth in the marketplace, I do think a
regulatory structure would be helpful in supporting the growth
of the market in the years to come regardless of what may come
from it from a technology perspective.
Mrs. Cammack. Well, I appreciate your feedback, and at some
point because I certainly cannot in a minute and 40 seconds
dive into the decentralized nature of what could be, so I am
going to just pivot here and hopefully we can have a time to
sit down and discuss further on this and I will have my office
reach out to yours.
But I do want to jump to a market stability question. Given
recent events in Ukraine, I come from a heavily ag district.
Farmers, ranchers, other commercial entities obviously rely on
futures markets to hedge risk. And the Russian invasion of
Ukraine has resulted, as you know, in extreme market volatility
and record trading volume on global markets. Obviously, we are
seeing fertilizer reach somewhere in the ballpark of 700
percent on some certain ones, particularly potash. Now, I want
to know, how is CFTC approaching this from a surveillance
standpoint?
Mr. Behnam. Congresswoman, we are on heightened alert. We
are making sure that we are understanding and identifying risks
in the marketplace. We are looking at the cash market and
seeing what we are seeing from a transportation standpoint,
from a supply chain standpoint, and ensuring those supply-
demand dynamics in the cash space are being properly reflected
in the futures space.
As I pointed out, our core responsibility is obviously on
derivatives markets. We have fraud and manipulation in the cash
markets, but if we can assure that markets are fair, operating
orderly, they are transparent, and that they are free from
fraud and manipulation, that means they are reflecting cash
supply-demand dynamics, and that means your constituents and
other producers can hedge those risks and eliminate some of
those extreme up and downs and continue to do their business as
intended.
Mrs. Cammack. Well, and I know my time is about to expire.
One last question, Mr. Chairman, if you would allow me to
submit for the record so I may get a written response, I would
be very much appreciative.
The Chairman. Thank you. And now we will hear from the
gentlelady from Illinois, Mrs. Miller, and she is recognized
for 5 minutes. This will be our final Member for today. Mrs.
Miller, you are now recognized.
Mrs. Miller. Thank you. Chairman Behnam, I know that
addressing climate-related market risk has been a priority for
you during your tenure at the Commission. But what role does
CFTC or derivatives products have in directly addressing
climate change?
Mr. Behnam. Congresswoman, inherently I think our markets
are risk-management markets. Our markets have been thinking
about data points related to climate for decades. That is
really at the core of what our markets do, whether it is a
tornado, a rainstorm, or a fire. And I think right now my goal
is to utilize the economists and the experts in the CFTC to
engage with the private market to support innovation so that we
can see new products and new development in this space that
would help mitigate some of the impacts of physical climate
change and also help support an orderly transition to a net-
zero economy.
Mrs. Miller. Thank you, and I yield back.
The Chairman. Thank you very much.
And now, before we adjourn, I want to invite our Ranking
Member to share his closing remarks, and then I will come and
give my closing remarks.
Mr. Thompson. All right, Mr. Chairman, thank you very much.
This was a great hearing. It was great to have Chairman Behnam
before us. And, I appreciate his comments, his overview, his
leadership of the Commodity Futures Trading Commission, which,
quite frankly, we have jurisdiction over and functions based on
principles.
I will take a moment to kind of shameless plug to encourage
my colleagues to join me with the Digital Commodities Exchange
Act. I think, as you heard from the exchange today, that
proposal, soon-to-be-introduced piece of legislation, I think
it provides the tools the CFTC needs, the clarity, the
definitions, the principles to be able to deal with this ever-
increasing digital commodity market. The United States has
always been a leader with the first generation of internet,
which is the internet of knowledge. The second generation,
which is the internet of things that we are kind of living
through right now. And, quite frankly, the third generation of
technology is the internet of value, which allows these digital
commodities to flourish. America has been a true leader, not a
follower, for the first and second version, and we need to
continue that for the internet 3.0, and this piece of
legislation will provide us the tools to do that.
So, Chairman Behnam, thank you to you, to your leadership.
We are excited to have you in this role. We are excited to have
your new colleagues that will be joining you. We need to make
sure that you have the resources that you need to be able to do
the job you have, and I think that includes obviously with this
expanding digital commodity market, additional resources for
the staff with expertise to make sure that America remains a
leader. So thank you. And, Mr. Chairman, I yield back.
The Chairman. Well, thank you, Ranking Member.
And Chairman Behnam, all I can say is thank you for your
articulate presentation, your knowledgeable presentation. We
are very fortunate to have you as our new CFTC Chairman. And I
think I speak for our entire Committee that we are very
fortunate to have you here, and we look forward to helping you
in any way that we can be helpful to your forward progress.
I do want to leave you with this caveat, however. As you
recall, I mentioned at the very beginning how I enlightened
myself during my early days in the knowledge of one Alexander
Hamilton. And the reason I want to mention that, our great
first Treasury Secretary, was where would we be without the
national banking system that he put together? The New York
Stock Exchange foundation, even our Federal Reserve. And George
Washington thought so much of him that he not only made him his
aide-de-camp but his first, his youngest Cabinet member as
Treasury Secretary. Where would we be if we did not take care
and flourish those frameworks of our great financial system in
this country?
That is why I am registering with you the importance of
doing the same care and tenderness that we have given to those
other institutions that have helped us through the
Revolutionary War, the national banking system did, all the way
up through the New York Stock Exchange, even paying our bills
out of the Revolutionary War, the Civil War, the depressions,
all the way through.
So now we are here with this other movement,
cryptocurrency. It is new. So were derivatives and swaps. But
these are the anchors. CME and ICE, they got us through that
and manifested that in the same pattern as Alexander Hamilton's
vision.
So what I am saying to you is--and you heard it from both
Democrats and Republicans, we want to not risk losing the
wealth of contribution and continuation of our great financial
system, of the intermediaries in this. We have to keep ICE and
CME strong the way we have kept all of the other institutions
historically that have kept our financial system as the
greatest in the world. That is all we say. Take care of the
bridge that has brought us through. And certainly ICE and CME
have done that so much.
So with that, I am now going to adjourn with these final
comments. Under the Rules of the Committee, the record of
today's hearing will remain open for 10 calendar days to
receive additional material and supplementary written responses
from the witness to any questions by any Member.
And now, before I adjourn, I want to thank our wonderful
staff headed up by Anne Simmons and Ashley Smith and Catherine.
I call her Catherine the Great, my chief of staff. We all work
together. Thank you all for this wonderful and very informative
hearing. This hearing is now adjourned.
[Whereupon, at 12:30 p.m., the Committee was adjourned.]
[Material submitted for inclusion in the record follows:]
Supplementary Material Submitted by Hon. Rostin Behnam, Chairman,
Commodity Futures Trading Commission
Insert
Mr. Johnson. So how about from the perspective of the United
Kingdom? Of course, that is not your job nor mine, but have
they also been able to secure a good landing spot in the wake
of Brexit?
Mr. Behnam. It is a good question, and you are right because
it wasn't just the EU who suffered or who had an outcome as a
result of Brexit. It was the UK of course as well. And as the
EU was starting to think about what they were going to do from
a regulatory perspective, perhaps the UK was just a little bit
behind. But we are having those conversations right now. I am
confident that we are having conversations that are heading in
the right direction. And what I mean by that is preserving U.S.
primacy, preserving primacy of the CFTC as the home country
regulator, leaning on the existing relationship between the
CFTC and my counterpart agency, and, above all else, using the
foundational relationship between the United States of America
and the United Kingdom, allowing them to trust us and the
regulations we have and the institutions that we have and
supervise as much as we need to trust them and the supervision
that they conduct over their institutions. So I am going to
lean on those principles and ensure they are successful.
Mr. Johnson. Let me [inaudible]--probably more valuable than
the question I was asking. And I am out of time, so if your
team can follow up afterward.
Mr. Behnam. Thank you.
Mr. Johnson. I guess I was asking more about whether or not
the European Union and their regulatory agreements with the
United Kingdom is going to allow the United Kingdom the
flexibility they need to also maintain how they operate because
I just think there could be a broader impact on global markets
if there are disruptions in that relationship. But thank you
very much. And sir, I yield back.
The Chairman. And Chairman Behnam, feel free to respond in
writing to Mr. Johnson's questions.
As the United Kingdom and European Union proceed with their ongoing
negotiations, we continue to monitor the developments and potential
effects on other markets, including that of the U.S. With a shared
interest in global financial stability, minimizing market
fragmentation, supporting vibrant, liquid derivatives markets, and
appropriate application of rules and supervisory oversight, we continue
to collaborate with our European and British counterparts.
______
Submitted Questions
Response from Hon. Rostin Behnam, Chairman, Commodity Futures Trading
Commission
Questions Submitted by Hon. Glenn Thompson, a Representative in
Congress from Pennsylvania
Question 1. Dodd-Frank divided jurisdiction of the swaps markets
between the CFTC and the SEC. However, the actual hedging products
themselves are often inter-linked and part of the same market
ecosystem. Therefore, SEC regulations that impact liquidity in the
SEC's subset of the swaps markets can impact liquidity and the costs of
transactions in the CFTC's regulated swap markets.
Are you aware of proposals the SEC is currently considering that
many market participants are concerned could reduce liquidity in
security based swaps? And have you given consideration to whether there
may be unintended consequences for liquidity in the CFTC swaps markets
that are closely linked to the SEC markets?
Answer. The SEC proposed rules for Security-Based Swaps largely
track those previously promulgated by CFTC. The CFTC will continue to
evaluate, and consult as appropriate, with the SEC concerning their
rule making proposals as they proceed through public comment and final
determination.
Question 2. Asset managers, pension funds and other investors and
end-users use a diverse array of products to manage risk that span both
SEC and CFTC jurisdiction. Do you agree the CFTC should prioritize
coordinating with the SEC to allow market participants to allow for
cross-margining in a single portfolio along with securities,
facilitating the efficiencies and risk mitigation this would create?
Answer. The CFTC supports portfolio margining and recognizes the
capital efficiencies that market participants may obtain in the form of
lower initial margin requirements by appropriately recognizing diverse
positions with offsetting risk characteristics in a single portfolio
margin account. In this regard, the CFTC has issued orders to
facilitate the portfolio margining of customer cleared credit default
swaps and cleared credit default security-based swaps held in a cleared
swaps account by a dually-registered futures commission merchant and
securities broker-dealer.\1\ The CFTC and SEC have also issued a joint
Request for Comment soliciting public input on potential ways to
implement portfolio margining of uncleared swaps and non-cleared
security-based swaps.\2\ The CFTC looks forward continuing its work
with the SEC to further explore potential portfolio margining benefits
for market participants.
---------------------------------------------------------------------------
\1\ Order, Treatment of Funds Held in Connection with Clearing by
ICE Clear Credit of Credit Default Swaps (Jan. 13, 2013), available at:
www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/
file/icecreditclearorder011413.pdf;Order, Treatment of Funds Held in
Connection with Clearing by ICE Clear Europe of Credit Default Swaps
(Apr. 9, 2013), available at: www.cftc.gov/sites/default/files/
stellent/groups/public/@requestsandactions/documents/ifdocs/
icecleareurope4dfcds040913.pdf.
\2\ Request for Comment, Portfolio Margining of Uncleared Swaps and
Non-Cleared Security-Based Swaps (Nov. 5, 2020), available at:
www.cftc.gov/sites/default/files/2020/11/2020-23928a.pdf.
Question 3. It is critical for companies in the U.S. to be able to
hedge their risks in the most liquid markets available. For some risks,
especially foreign currency risks, those markets are overseas, in the
home country of the currency. For the past decade, the Committee has
been committed to a robust substituted compliance regime for cross-
border transactions, in which the CFTC defers to home country
regulators when their rules are on par with, but not identical to, U.S.
requirements.
In making substituted compliance determinations, the Commission
should look to replicate the regulatory outcomes of U.S. rules, not the
specific rules themselves. This outcomes-based-comparison ensures that
U.S. market participants are able to access the foreign markets which
are best suited to their hedging needs, when those markets are
appropriately supervised by their home country regulators, under rules
which make sense for that foreign market.
In some cases, it appears that the Commission's substituted
compliance determinations for the trading and clearing of OTC swaps
denominated in non-USD currencies do not adhere to this standard. Would
you commit to examining these determinations to ensure that like
outcomes are granted comparable substituted compliance treatment, so
that U.S. customers can continue to hedge and manage their business
risks around the world?
Answer. The CFTC works to approach comparability determinations
using a holistic evaluation of the foreign jurisdiction's statutory and
regulatory regime, rather than a line by line comparison.
Determinations have been issued where the outcomes are determined to be
comparable. In the cross-border guidance from 2013, the Commission
articulated a holistic, outcomes-based evaluation and we have been
operating consistent with that guidance. Staff is not aware of any
specific cases of concern but is happy to review if there are any
additional details that can be provided.
attachment 1
------------------------------------------------------------------------
-------------------------------------------------------------------------
United States of America
Before the
Commodity Futures Trading Commission
------------------------------------------------------------------------
Treatment of Funds Held in Connection with
Clearing by ICE Clear Credit of Credit Default Swaps
------------------------------------------------------------------------
Order
------------------------------------------------------------------------
ICE Clear Credit LLC (``ICE Clear Credit''), a derivatives clearing
organization (``DCO'') registered under Section 5b of the Commodity
Exchange Act (``Act'') and a securities clearing agency registered
under Section 17A of the Securities Exchange Act of 1934 (``Exchange
Act''), has submitted a request that the Commodity Futures Trading
Commission (``Commission'') issue an Order permitting ICE Clear Credit
and its clearing members that are broker-dealers registered under
Section 15(b) of the Exchange Act and are also futures commission
merchants registered under Section 4f(a)(1) of the Act
(``Participants'') (i) to hold in a cleared swaps account, subject to
Section 4d(f) of the Act, customer money, securities, and property
(collectively, ``customer property'') used to margin, guarantee, or
secure both cleared swaps and cleared security-based swaps; and (ii) to
provide for portfolio margining of such cleared swaps and cleared
security-based swaps.
The request was posted on the Commission's website for a 30 day
public comment period which ended on December 22, 2011. Seven
substantive comment letters were received during the comment period,
all of which supplied the Commission's issuance of an Order pursuant to
Section 4d(f) of the Act.
The Commission has reviewed the request and supplemental
information provided by ICE Clear Credit (``Submission''), and finds
that ICE Clear Credit has demonstrated that it can continue to comply
with the requirements under the Act and the Commission's regulations
thereunder applicable to it, including in connection with the
Submission. Therefore,
It Is Ordered, pursuant to Section 4d(f) of the Act, 7 U.S.C.
6d(f), that, subject to the terms and conditions below, ICE Clear
Credit and its Participants that are acting pursuant to this Order may
hold customer property used to margin, guarantee, or secure positions
in cleared security-based swaps with other customer property used to
margin, guarantee, or secure positions in cleared swaps, in a cleared
swaps account or accounts maintained in accordance with Section 4d(f)
of the Act (including any applicable orders issued pursuant to Section
4d(f) of the Act) and the regulations thereunder, and provide for
portfolio margining of such cleared swaps and cleared security-based
swaps, subject to the requirements of Commission Regulation
39.13(g)(4). All such customer property shall be accounted for and
treated and dealt with as belonging to the cleared swaps customers of
the Participant consistent with Section 4d(f) of the Act and the
regulations thereunder.
It Is Further Ordered, that:
(1) Customer property used to margin, guarantee, or secure positions
in credit default swaps (``CDS'') that are narrow-based
index CDS or single-name CDS (together, ``Security-Based
CDS'') that are currently, or will in the future be,
cleared through ICE Clear Credit, may be commingled and
portfolio margined with broad-based index CDS that are
currently, or will in the future be, cleared through ICE
Clear Credit, in accounts subject to Section 4d(f) of the
Act.
(2) Each Participant acting pursuant to this Order shall take
appropriate measures to identify, measure, and monitor
financial risk associated with carrying the Security-Based
CDS in a cleared swaps account and implement risk
management procedures to address those financial risks.
(3) Each Participant acting pursuant to this Order shall provide
notice to its customers that customer property used to
margin, guarantee, or secure Security-Based CDS will not
receive customer protection treatment under the Exchange
Act or Securities Investor Protection Act of 1970, and will
instead receive customer protection treatment under
Subchapter IV of Chapter 7 of Title 11 of the United States
Code and the rules and regulations thereunder.
(4) ICE Clear Credit shall apply appropriate risk management
oversight procedures with respect to positions in the
Security-Based CDS. ICE Clear Credit shall conduct
oversight sufficient to assure that each Participant acting
pursuant to this Order has the operational capabilities
necessary to manage defaults in such positions.
(5) ICE Clear Credit shall require Participants to collect customer
initial margin, as defined in Commission Regulation
1.3(bbb), from their customers at a minimum level
determined by ICE Clear Credit.
(6) ICE Clear Credit shall conduct financial surveillance and
oversight with respect to the Security-Based CDS carried by
each Participant acting pursuant to this Order.
(7) ICE Clear Credit and each Participant acting pursuant to this
Order shall take all other steps appropriate to manage risk
related to clearing the Security-Based CDS.
(8) ICE Clear Credit and each Participant acting pursuant to this
Order shall hold all customer property deposited with ICE
Clear Credit and such Participant, respectively, to margin,
guarantee, or secure Security-Based CDS in accordance with
the requirements of section 4d(f) of the Act and the
Commission's regulations thereunder.
(9) ICE Clear Credit shall at all times fulfill all representations
made in the Submission.
This Order is issued pursuant to Section 4d(f) of the Act based
upon the representations made and supporting material provided to the
Commission by ICE Clear Credit in its Submission. Any changes or
omissions in the material facts and circumstances pursuant to which
this Order is granted might require the Commission to reconsider its
finding that the relief set forth herein is appropriate. Further, in
its discretion, the Commission may condition, modify, suspend,
terminate, or otherwise restrict the exemptive relief granted in this
Order, as appropriate, on its own motion.
Issued in Washington, D.C., this 14[t]h day of January, 2013.
By the Commission
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Melissa Jurgens,
Secretary of the Commission.
attachment 2
------------------------------------------------------------------------
-------------------------------------------------------------------------
United States of America
Before the
Commodity Futures Trading Commission
------------------------------------------------------------------------
Treatment of Funds Held in Connection with
Clearing by ICE Clear Europe of Credit Default Swaps
------------------------------------------------------------------------
Order
------------------------------------------------------------------------
ICE Clear Europe Limited (``ICE Clear Europe''), a derivatives
clearing organization (``DCO'') registered under Section 5b of the
Commodity Exchange Act (``Act'') and a securities clearing agency
registered under Section 17A of the Securities Exchange Act of 1934
(``Exchange Act''), has submitted a request that the Commodity Futures
Trading Commission (``Commission'') issue an Order permitting ICE Clear
Europe and its clearing members that are broker-dealers registered
under Section 15(b) of the Exchange Act and are also futures commission
merchants registered under Section 4f(a)(1) of the Act
(``Participants'') (i) to hold in a cleared swaps account, subject to
Section 4d(f) of the Act, customer money, securities, and property
(collectively, ``customer property'') used to margin, guarantee, or
secure both cleared swaps and cleared security-based swaps; and (ii) to
provide for portfolio margining of such cleared swaps and cleared
security-based swaps.
The request was posted on the Commission's website for a 30 day
public comment period which ended on December 14, 2012. One comment
letter was received during the comment period, which supported the
Commission's issuance of an Order pursuant to Section 4d(f) of the Act.
The Commission has reviewed the request and supplemental
information provided by ICE Clear Europe (``Submission''), and finds
that ICE Clear Europe has demonstrated that it can continue to comply
with the requirements under the Act and the Commission's regulations
thereunder applicable to it, including in connection with the
Submission. Therefore,
It Is Ordered, pursuant to Section 4d(f) of the Act, 7 U.S.C.
6d(f), that, subject to the terms and conditions below, ICE Clear
Europe and its Participants that are acting pursuant to this Order may
hold customer property used to margin, guarantee, or secure positions
in cleared security-based swaps with other customer property used to
margin, guarantee, or secure positions in cleared swaps, in a cleared
swaps account or accounts maintained in accordance with Section 4d(f)
of the Act (including any applicable orders issued pursuant to Section
4d(f) of the Act) and the regulations thereunder, and provide for
portfolio margining of such cleared swaps and cleared security-based
swaps, subject to the requirements of Commission Regulation
39.13(g)(4). All such customer property shall be accounted for and
treated and dealt with as belonging to the cleared swaps customers of
the Participant consistent with Section 4d(f) of the Act and the
regulations thereunder.
It Is Further Ordered, that:
(1) Customer property used to margin, guarantee, or secure positions
in credit default swaps (``CDS'') that are narrow-based
index CDS or single-name CDS (together, ``Security-Based
CDS'') that are currently, or will in the future be,
cleared through ICE Clear Europe, may be commingled and
portfolio margined with broad-based index CDS that are
currently, or will in the future be, cleared through ICE
Clear Europe, in accounts subject to Section 4d(f) of the
Act.
(2) Each Participant acting pursuant to this Order shall take
appropriate measures to identify, measure, and monitor
financial risk associated with carrying the Security-Based
CDS in a cleared swaps account and implement risk
management procedures to address those financial risks.
(3) Each Participant acting pursuant to this Order shall provide
notice to its customers that customer property used to
margin, guarantee, or secure Security-Based CDS will not
receive customer protection treatment under the Exchange
Act or Securities Investor Protection Act of 1970, and will
instead receive customer protection treatment under
Subchapter IV of Chapter 7 of Title 11 of the United States
Code and the rules and regulations thereunder.
(4) ICE Clear Europe shall apply appropriate risk management
oversight procedures with respect to positions in the
Security-Based CDS. ICE Clear Europe shall conduct
oversight sufficient to assure that each Participant acting
pursuant to this Order has the operational capabilities
necessary to manage defaults in such positions.
(5) ICE Clear Europe shall require Participants to collect customer
initial margin, as defined in Commission Regulation
1.3(bbb), from their customers at a minimum level
determined by ICE Clear Europe.
(6) ICE Clear Europe shall conduct financial surveillance and
oversight with respect to the Security-Based CDS carried by
each Participant acting pursuant to this Order.
(7) ICE Clear Europe and each Participant acting pursuant to this
Order shall take all other steps appropriate to manage risk
related to clearing the Security-Based CDS.
(8) ICE Clear Europe and each Participant acting pursuant to this
Order shall hold all customer property deposited with ICE
Clear Europe and such Participant, respectively, to margin,
guarantee, or secure Security-Based CDS in accordance with
the requirements of section 4d(f) of the Act and the
Commission's regulations thereunder.
(9) ICE Clear Europe shall at all times fulfill all representations
made in the Submission.
This Order is issued pursuant to Section 4d(f) of the Act based
upon the representations made and supporting material provided to the
Commission by ICE Clear Europe in its Submission. Any changes or
omissions in the material facts and circumstances pursuant to which
this Order is granted might require the Commission to reconsider its
finding that the relief set forth herein is appropriate. Further, in
its discretion, the Commission may condition, modify, suspend,
terminate, or otherwise restrict the exemptive relief granted in this
Order, as appropriate, on its own motion.
Issued in Washington, D.C., this 9th day of April, 2013.
By the Commission
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Melissa Jurgens,
Secretary of the Commission.
attachment 3
Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 /
Proposed Rules
Commodity Futures Trading Commission
17 CFR Part 23
RIN 3038-AF07
Securities and Exchange Commission
17 CFR Part 240
[Release No. 34-90246; File No. S7-15-20]
RIN 3235-AM64
Portfolio Margining of Uncleared Swaps and Non-Cleared Security-Based
Swaps
AGENCY: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Request for comment.
SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and
the Securities and Exchange Commission (``SEC'') (collectively, the
``Commissions'') seek public comment on potential ways to implement
portfolio margining of uncleared swaps and non-cleared security-based
swaps.
DATES: Comments should be received on or before December 7, 2020.
ADDRESSES: Comments should be sent to both agencies at the
addresses listed below.
CFTC: You may submit comments, identified by RIN 3038-AF07, by any
of the following methods: CFTC website: https://comments.cftc.gov.
Follow the instructions for submitting comments through the website.
Mail: Christopher Kirkpatrick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Same as Mail above.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish for the CFTC to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in CFTC Rule 145.9, 17 CFR 145.9.
The CFTC reserves the right, but shall have no obligation, to
review, prescreen, filter, redact, refuse, or remove any or all of your
submission from https://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
SEC: Comments may be submitted by any of the following methods:
Electronic Comments
Use the SEC's internet comment form (http://www.sec.gov/
rules/other.shtml); or
Send an email to [email protected]. Please include File
No. S7-15-20 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-15-20. This file number
should be included on the subject line if email is used. To help the
SEC process and review your comments more efficiently, please use only
one method of submission. The SEC will post all comments on the SEC's
website (http://www.sec.gov). Comments are also available for website
viewing and printing in the SEC's Public Reference Room, 100 F Street
NE, Washington, DC 20549, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT:
CFTC: Thomas J. Smith, Deputy Director, at (202) 418-5495,
[email protected] or Joshua Beale, Associate Director, at (202) 418-5446,
[email protected], Division of Swap Dealer and Intermediary Oversight;
Robert B. Wasserman, Chief Counsel and Senior Advisor, at (202) 418-
5092, [email protected], Division of Clearing and Risk, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
NW, Washington, DC 20581.
SEC: Michael A. Macchiaroli, Associate Director, at (202) 551-5525;
Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W.
Roy, Deputy Associate Director, at (202) 551-5522; Raymond Lombardo,
Assistant Director, at 202-551-5755; or Sheila Dombal Swartz, Senior
Special Counsel, at (202) 551-5545, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.
Supplementary Information:
I. Introduction
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Title VII'') established a new regulatory framework
for the U.S. over-the-counter (``OTC'') derivatives markets.\1\ The
Dodd-Frank Act assigns responsibility for certain aspects of the U.S.
OTC derivatives markets to the CFTC and the SEC. In particular, the
CFTC has oversight authority with respect to swaps, and the SEC has
oversight authority with respect to security-based swaps.\2\ The CFTC
has adopted final margin rules for uncleared swaps applicable to
nonbank swap dealers and nonbank major swap participants.\3\ The SEC
has adopted final margin requirements for non-cleared security-based
swaps applicable to nonbank security-based swap dealers (``SBSDs'') and
nonbank major security-based swap participants (``MSBSPs'').\4\ Bank
regulators have adopted capital and margin requirements for bank swap
dealers and bank major swap participants and for bank SBSDs and bank
MSBSPs pursuant to Title VII.\5\ The SEC and CFTC also have issued
exemptive orders to facilitate the portfolio margining of cleared swaps
and security-based swaps that are credit default swaps (``CDS'') held
in a swap account.\6\
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\1\ See Public Law 111-203, 771 through 774 (``Dodd-Frank Act'').
\2\ The CFTC has oversight authority with respect to a ``swap'' as
defined in Section 1(a)(47) of the Commodity Exchange Act (``CEA'') (7
U.S.C. 1(a)(47)), including to implement a registration and oversight
program for a ``swap dealer'' as defined in Section 1(a)(49) of the CEA
(7 U.S.C. 1(a)(49)) and a ``major swap participant'' as defined in
Section 1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). The SEC has oversight
authority with respect to a ``security-based swap'' as defined in
Section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)), including
to implement a registration and oversight program for a ``security-
based swap dealer'' as defined in Section 3(a)(71) of the Exchange Act
(15 U.S.C. 78c(a)(71)) and a ``major security-based swap participant''
as defined in Section 3(a)(67) of the Exchange Act (15 U.S.C.
78c(a)(67)). The SEC and the CFTC jointly have adopted rules to further
define those terms. See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, Exchange Act Release No.
67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012); Further Definition
of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and ``Eligible
Contract Participant,'' Exchange Act Release No. 66868 (Apr. 27, 2012),
77 FR 30596 (May 23, 2012).
\3\ CFTC, Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``CFTC Final
Margin Release''). The Commissions use the terms ``uncleared swaps''
and ``non-cleared security-based swaps'' throughout this request for
comment because those are the defined terms adopted in their respective
final margin rules.
\4\ SEC, Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap Participants
and Capital and Segregation Requirements for Broker-Dealers (``SEC
Final Capital, Margin and Segregation Release''), Exchange Act Release
No. 86175 (June 21, 2019), 84 FR 43872, 43956-43957 (Aug. 22, 2019).
The compliance date for the SEC's margin rules is October 6, 2021.
Covered counterparties under the CFTC's uncleared swap margin rules
already post and collect variation margin. CFTC initial margin
requirements are being implemented under a phase-in schedule through
September 1, 2022. See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 85 FR 41463 (Jul. 10, 2020); see
also CFTC, Press Release Number 8287-20, CFTC Finalizes Position Limits
Rule at October 15 Open Meeting, Commission Also Approves Final Rules
on Margin Requirements for Uncleared Swaps and Registration Exemptions
for Foreign Commodity Pools (Oct. 15, 2020).
\5\ See Margin and Capital Requirements for Covered Swap Entities,
80 FR 74840 (Nov. 30, 2015). These margin requirements for bank
entities were adopted by the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Farm Credit Administration, or the
Federal Housing Finance Agency (collectively, these organizations are
known as the ``prudential regulators'').
\6\ Order Granting Conditional Exemptions under the Securities
Exchange Act of 1934 in Connection with Portfolio Margining of Swaps
and Security-based Swaps, Exchange Act Release No. 68433 (Dec. 12,
2012) 77 FR 75211 (Dec. 19, 2012); CFTC, Order, Treatment of Funds Held
in Connection with Clearing by ICE Clear Credit of Credit Default Swaps
(Jan. 13, 2013), available at: https://www.cftc.gov/sites/default/
files/idc/groups/public/@newsroom/documents/file/
icecreditclearorder011413.pdf; CFTC, Order, Treatment of Funds Held in
Connection with Clearing by ICE Clear Europe of Credit Default Swaps
(Apr. 9, 2013), available at: https://www.cftc.gov/sites/default/files/
stellent/groups/public/@requestsandactions/documents/ifdocs/
icecleareurope4dfcds040913.pdf.
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In implementing Title VII, the Commissions are committed to working
together to ensure that each agency's respective regulations are
effective, consistent, mutually reinforcing, and efficient. In certain
cases, the Commissions believe that these objectives may be served
better by harmonizing requirements. Portfolio margining is one area
where the Commissions believe it is appropriate to explore whether
increased harmonization would better serve the purposes of Title VII.
Portfolio margining generally refers to the cross margining of
related positions in a single account, allowing netting of appropriate
offsetting exposures. Portfolio margining of uncleared swaps, non-
cleared security-based swaps, and related positions can offer benefits
to customers and the markets, including promoting greater efficiencies
in margin calculations with respect to offsetting positions. This can
align margining and other costs more closely with overall risks
presented by a customer's portfolio. This alignment can reduce the
aggregate amount of collateral required to meet margin requirements,
facilitating the availability of excess collateral that can be deployed
for other purposes. The netting of exposures allowed by portfolio
margining may also help to improve efficiencies in collateral
management, alleviate excessive margin calls, improve cash flows and
liquidity, and reduce volatility.
At the same time, facilitating portfolio margining for uncleared
swaps, noncleared security-based swaps, and related positions requires
careful consideration to ensure that any customer protection, financial
stability and other applicable regulatory objectives and potential
impacts are appropriately considered and addressed. These
considerations include, among other things, potential impacts on margin
requirements, the segregation and bankruptcy treatment of uncleared
swaps and non-cleared security-based swaps in different account types
and entities, and the potential impact on regulatory capital
requirements.
The implementation of portfolio margining of uncleared swaps and
noncleared security-based swaps also requires careful consideration of
the differences in the capital, margin, and segregation requirements of
the CFTC and SEC applicable to uncleared swaps and non-cleared
security-based swaps, respectively. These differences reflect the
policy objectives of, and choices made by, each agency and reflect each
agency's assessment of potential costs and benefits of alternative
approaches and the impact on the markets for swaps and security-based
swaps. The differences between the CFTC and SEC requirements is a
result of these differing policy objectives and related assessments.
For example, the CFTC's margin rule for uncleared swaps requires
swap dealers to collect and post initial margin to certain
counterparties, subject to exceptions.\7\ When adopting this
requirement, the CFTC stated that ``the posting requirement under the
final rule is one way in which the Commission seeks to reduce overall
risk to the financial system, by providing initial margin to non-dealer
swap market counterparties that are interconnected participants in the
financial markets (i.e., financial end-users that have material swap
exposure).'' \8\ The CFTC further noted that commenters stated that
requiring swap dealers to post initial margin ``not only would better
protect financial end-users from concerns about the failure of [the
swap dealer], but would also act as a discipline on [swap dealers] by
requiring them to post margin reflecting the risk of their swaps
business.'' \9\
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\7\ See 17 CFR 23.152.
\8\ See CFTC Final Margin Release, 81 FR at 649.
\9\ Id.
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The SEC's margin rule for non-cleared swaps does not require
nonbank SBSDs to post initial margin.\10\ The SEC stated when adopting
the margin rule that ``[r]equiring nonbank SBSDs to deliver initial
margin could impact the liquidity of these firms'' and that
``[d]elivering initial margin would prevent this capital of the nonbank
SBSD from being immediately available to the firm to meet liquidity
needs.'' \11\ The SEC further stated that, ``[i]f the delivering SBSD
is undergoing financial stress or the markets more generally are in a
period of financial turmoil, a nonbank SBSD may need to liquidate
assets to raise funds and reduce its leverage'' and that ``[a]ssets in
the control of a counterparty would not be available for this
purpose.'' \12\
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\10\ See 17 CFR 240.18a-3.
\11\ See SEC Final Capital, Margin and Segregation Release, 84 FR
at 43918.
\12\ Id.
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In addition, the CFTC's margin rule requires that initial margin
posted to or by the swap dealer must be held by a third-party custodian
and does not permit the initial margin to be re-hypothecated.\13\ When
adopting the margin rule, the CFTC stated ``that the ultimate purpose
of the custody agreement is twofold: (1) That the initial margin be
available to a counterparty when its counterparty defaults and a loss
is realized that exceeds the amount of variation margin that has been
collected as of the time of default; and (2) initial margin be returned
to the posting party after its swap obligations have been fully
discharged.'' \14\
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\13\ See 17 CFR 23.157.
\14\ See CFTC Final Margin Release, 81 FR at 670.
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The SEC margin rule for non-cleared swaps does not require that
initial margin posted to the nonbank SBSD be held at a third-party
custodian.\15\ The SEC stated that this difference from the CFTC's
margin rule reflects its ``judgment of how to `help ensure the safety
and soundness' of nonbank SBSDs . . . as required by Section
15F(e)(3)(i) of the Exchange Act.'' \16\
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\15\ See 17 CFR 240.18a-3.
\16\ See SEC Final Capital, Margin and Segregation Release, 84 FR
at 43909.
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Moreover, there are differences in the segregation schemes for
swaps and security-based swaps. As discussed above, the CFTC's margin
rule requires initial margin received from customers with respect to
uncleared swaps to be held by an independent third-party custodian.
With respect to the SEC's rules for non-cleared security-based
swaps, Section 3E(f) of the Exchange Act establishes a program by which
a counterparty to an SBSD can elect to have an independent third-party
custodian hold the initial margin it posts to the SBSD.\17\ Section
3E(f)(4) provides that if the counterparty does not choose to require
segregation of funds or other property (i.e., waives segregation), the
SBSD shall send a report to the counterparty on a quarterly basis
stating that the firm's back office procedures relating to margin and
collateral requirements are in compliance with the agreement of the
counterparties.\18\ Security-based swap customers of a broker-dealer
(other than an OTC derivatives dealer), including a broker-dealer
registered as an SBSD, that are not affiliates of the firm cannot waive
segregation. The SEC explained that this prohibition against waiving
the segregation requirement in the case of a non-affiliated customer of
the broker-dealer is a consequence of the broker-dealer segregation
rule--Rule 15c3-3--being promulgated under Section 15(c)(3) of the
Exchange Act, which does not have an analogous provision to Section
3E(f) of the Exchange Act.\19\ More specifically, Section 15(c)(3) of
the Exchange Act and Rule 15c3-3 thereunder do not contain provisions
pursuant to which a customer can waive segregation.\20\ The SEC further
explained that the prohibition will protect customers and the safety
and soundness of broker-dealers.\21\
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\17\ See 15 U.S.C. 78c-5(f).
\18\ See 15 U.S.C. 78c-5(f)(4)[.]
\19\ See SEC Final Capital, Margin and Segregation Release, 84 FR
at 43931. See also 17 CFR 240.15c3-3; 15 U.S.C. 78o(c)(3); 15 U.S.C.
78c-5(f)(4).
\20\ See SEC Final Capital, Margin and Segregation Release, 84 FR
at 43931.
\21\ Id. at 43931.
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In addition to these two statutory options, the SEC adopted
segregation rules permitting broker-dealers and SBSDs to hold and
commingle initial margin received from security-based swap customers.
These rules restrict how initial margin can be used by a broker-dealer
or SBSD and require that it be held in a manner that is designed to
facilitate its prompt return to the customers (``omnibus segregation
rules'').\22\ The omnibus segregation rules are mandatory requirements
with respect to cleared security-based swaps and the default
requirements with respect to non-cleared security-based swaps if a
customer of an SBSD does not choose one of the two statutory options:
(1) Having initial margin held by an independent third-party custodian
or (2) waiving segregation, if permitted.
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\22\ See 17 CFR 240.15c3-3(p); 17 CFR 240.18a-4. See also SEC Final
Capital, Margin and Segregation Release, 84 FR at 43930-43.
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The omnibus segregation rules permit broker-dealers and SBSDs to
re-hypothecate initial margin received with respect to non-cleared
swaps under limited circumstances. In the case of a broker-dealer
(other than an OTC derivatives dealer), including a broker-dealer
registered as an SBSD, the ability to re-hypothecate initial margin is
limited. For example, if the broker-dealer enters into a non-cleared
security-based swap with a customer and hedges that transaction with a
second broker-dealer, the first broker-dealer can use the initial
margin collected from its customer to meet a regulatory margin
requirement arising from a transaction with a second SBSD to hedge the
transaction with the customer.\23\ The SEC stated that it ``designed
the hedging exception for non-cleared security-based swap collateral to
accommodate dealers in OTC derivatives maintaining `matched books' of
transactions.'' \24\
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\23\ See 17 CFR 240.15c3-3(p)(1)(ii)(B) and (p)(2).
\24\ See SEC Final Capital, Margin and Segregation Release, 84 FR
at 43937 (footnote omitted).
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Similarly, an SBSD that is registered as an OTC derivatives dealer
or not registered as a broker-dealer (both types of SBSDs hereinafter a
``Stand-Alone SBSD'') that enters into a non-cleared, security-based
swap with a customer and hedges that transaction with another SBSD also
may use the initial margin collected from its customer to meet a
regulatory margin requirement arising from the hedging transaction with
the other SBSD.\25\ This provision applies if the Stand-Alone SBSD is
required to comply with the omnibus segregation requirements of Rule
18a-4 or offers omnibus segregation to its customers.\26\ However,
pursuant to Section 3E(f) of the Exchange Act, customers of a Stand-
Alone SBSD also may waive their right to have initial margin for non-
cleared security-based swaps segregated, and a Stand-Alone SBSD can
operate under an exemption from the omnibus segregation requirements of
Rule 18a-4, subject to certain conditions.\27\ If the customer waives
segregation or the Stand-Alone SBSD operates under the exemption from
Rule 18a-4, the Stand-Alone SBSD may re-hypothecate the initial margin
without restriction. Pursuant to Section 3E(f) of the Exchange Act,
customers of this Stand-Alone SBSD can elect to have the initial margin
they post to the SBSD held by a third-party custodian rather than
waiving the right to segregation.\28\ The SEC explained that permitting
customers to elect to either have their initial margin held by a third-
party custodian or waive their right to segregation reflected the
provisions of Section 3E(f) of the Exchange Act, providing customers
with these two options.\29\
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\25\ See 17 CFR 240.18a-4(a)(2)(ii) and (b).
\26\ See 17 CFR 240.18a-4.
\27\ See 15 U.S.C. 78c-5(f)(4); 17 CFR 18a-4(f).
\28\ See 15 U.S.C. 78c-5(f)(4).
\29\ See SEC Final Capital, Margin and Segregation Release, 84 FR
at 43877-78, 43930, 43937.
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Finally, the implementation of portfolio margining of uncleared
swaps and non-cleared security-based swaps also requires careful
consideration of the potential impact on competition, including how it
might influence customer behavior in selecting to do business with
certain types of registrants (e.g., firms with multiple registrations
that permit them to engage in a broader range of activities).
Given the scope, importance and interrelationships among the
matters to consider, the Commissions believe it would be helpful to
gather further information and comment from interested persons
regarding portfolio margining of uncleared swaps and noncleared
security-based swaps. In section III below, the Commissions request
comment generally on portfolio margining these instruments and on
portfolio margining these positions in different account types.
II. Regulatory Background
The specific requests for comment below take into account: (1) The
types of registrations (broker-dealer, OTC derivatives dealer, SBSD,
futures commission merchant (``FCM''), and swap dealer) an entity may
need in order to engage in portfolio margining of uncleared swaps, non-
cleared security-based swaps, and related positions; (2) the account
types (securities account, security-based swap account, and swap
account) these registrants can maintain; and (3) the margin and
segregation requirements that apply to products carried in these
account types. In particular, a broker or dealer in securities must be
registered with the SEC. A broker-dealer that limits securities dealing
to OTC equity options and other OTC derivatives can operate as a
special purpose broker-dealer known as an OTC derivatives dealer. An
entity that deals in security-based swaps above a de minimis notional
threshold will need to register with the SEC as an SBSD. An entity that
solicits and accepts funds from customers to margin, secure, or
guarantee futures, options on futures, or cleared swap transactions
must register with the CFTC as an FCM. And, an entity that deals in
swaps above a de minimis notional threshold must register with the CFTC
as a swap dealer.
A. Broker-Dealers
A broker-dealer is subject to initial margin requirements
promulgated by the Board of Governors of the Federal Reserve System
(``Federal Reserve Board'') in Regulation T.\30\ A broker-dealer also
is subject to maintenance margin requirements promulgated by self-
regulatory organizations (``SROs'').\31\ The initial margin
requirements of Regulation T generally govern the amount of credit that
can be extended by a broker-dealer to finance a position in a margin
account. The maintenance margin requirements of the SROs govern the
amount of equity that must be maintained in the margin account on an
ongoing basis. Regulation T has an exception from its initial margin
requirements for accounts that are margined pursuant to an SRO
portfolio margin rule.\32\ SROs have adopted portfolio margin rules
subject to this exception and, therefore, a broker-dealer must collect
initial and maintenance margin in a portfolio margin account in
accordance with the SRO portfolio margin rules. Margin calculations
under the SRO portfolio margin rules are based on the method in
Appendix A to Rule 15c3-1 (``Appendix A Methodology'').\33\ With
respect to options, initial and maintenance margin requirements are
generally set by the SROs.\34\
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\30\ 12 CFR 220.1, et seq.
\31\ See, e.g., FINRA Rules 4210-4240. Customers of broker-dealers
are also subject to specific margin rules for security futures, jointly
regulated by the CFTC and the SEC.
\32\ 12 CFR 220.1(b)(3)(i).
\33\ See, e.g., FINRA Rule 4210(g).
\34\ 12 CFR 220.12(f).
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A broker-dealer also is subject to margin rules for security
futures promulgated jointly by the Commissions.\35\ Security futures
margined in an SRO portfolio margin account are not subject to the
Commissions' rules and, therefore, are margined according to the SRO
portfolio margin rules.\36\
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\35\ See 17 CFR 41.42-41.49 (CFTC regulations); 17 CFR 242.400-
242.406 (SEC regulations).
\36\ See 17 CFR 242.400(c)(2).
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A broker-dealer that operates as an OTC derivatives dealer is
exempt from the requirements of Regulation T, provided that the firm
complies with Regulation U of the Federal Reserve Board.\37\ While an
OTC derivative dealer is subject to Regulation U, this rule generally
does not prescribe margin requirements for OTC derivatives such as OTC
equity options. The firm also is exempt from membership in an SRO and,
therefore, not subject to SRO margin rules.\38\
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\37\ 17 CFR 240.36a1-1.
\38\ 17 CFR 240.15b9-2.
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A broker-dealer that is also registered as an SBSD will be subject
to the margin requirements of Rule 18a-3 for noncleared security-based
swaps on the compliance date for that rule.\39\ A broker-dealer SBSD
may apply to the SEC for authorization to use a model (including an
industry standard model) to calculate initial margin for noncleared
security-based swaps. However, broker-dealer SBSDs (other than OTC
derivatives dealers registered as SBSDs (``OTCDD/SBSDs'')) must use
standardized haircuts prescribed in Rule 15c3-1 (which includes the
option to use the Appendix A Methodology) to compute initial margin for
non-cleared equity security-based swaps (even if the firm is approved
to use a model to calculate initial margin for other types of
positions).\40\ Moreover, as discussed above, Rule 18a-3 does not
require a nonbank SBSD to post initial margin to any counterparties.
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\39\ See 17 CFR 240.18a-3.
\40\ 17 CFR 240.15c3-1.
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A broker-dealer that holds customer securities and cash (including
securities and cash being used as initial margin) is subject to Rule
15c3-3.\41\ The SEC amended Rule 15c3-3 to adopt the omnibus
segregation requirements for security-based swaps applicable to a
broker-dealer and a broker-dealer (other than an OTC derivatives
dealer) also registered as a SBSD.\42\ A customer of a broker-dealer
that is also registered as an SBSD can elect to have initial margin
held by a third-party custodian pursuant to Section 3E(f) of the
Exchange Act or held by the SBSD subject to the omnibus segregation
requirements of Rule 15c3-3. Customers that are not affiliates of the
broker-dealer cannot waive segregation, whereas affiliates can waive
segregation.
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\41\ 17 CFR 240.15c3-3. For a discussion of Rule 15c3-3, see SEC,
Capital, Margin, and Segregation Proposing Release, 77 FR at 70276-
70277. Regulation T and portfolio margin accounts are combined when
calculating segregation requirements under Exchange Act Rule 15c3-3.
\42\ See 17 CFR 240.15c3-3(p).
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As discussed above, the broker-dealer can re-hypothecate initial
margin received from a customer for the limited purpose of entering
into a transaction with another SBSD that hedges the transaction with
the customer.\43\ Cash and securities held in a securities account at a
broker-dealer (other than an OTC derivatives dealer) \44\ is protected
under the Securities Investor Protection Act (``SIPA''), subject to
certain exceptions. An OTC derivatives dealer is not subject to Rule
15c3-3 and is not a member of the Security Investor Protection
Corporation.\45\ Consequently, cash and securities held in a securities
account at an OTC derivatives dealer are not protected by SIPA.
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\43\ See 17 CFR 240.15c3-3(p)(1)(ii)(B) and (p)(2).
\44\ See section II.A (describing regulatory requirements for OTC
derivatives dealers).
\45\ 17 CFR 240.15c3-3(a)(1) (defining the term customer to exclude
a counterparty to an OTC derivatives transaction with an OTC
derivatives dealer if certain conditions are met) and 17 CFR 240.36a1-2
(Exemption from SIPA for OTC derivatives dealers).
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B. Nonbank Stand-Alone SBSDs
A Stand-Alone SBSD that is not a bank (``Nonbank Stand-Alone
SBSD'') will be subject to the margin requirements of Rule 18a-3 for
noncleared security-based swaps on the compliance date for that
rule.\46\ A Nonbank Stand-Alone SBSD may apply to the SEC for
authorization to use a model (including an industry standard model) to
calculate initial margin for non-cleared security-based swaps.
Moreover, unlike a broker-dealer (other than an OTCDD/SBSD) registered
as an SBSD, a Nonbank Stand-Alone SBSD may use a model to calculate
initial margin for non-cleared equity security-based swaps, provided
the account of the counterparty does not hold equity security positions
other than equity security-based swaps and equity swaps. Initial margin
requirements also may be calculated by applying the standardized
haircuts prescribed in Rule 18a-1, the net capital rule for Stand-Alone
SBSDs.\47\ As discussed above, Rule 18a-3 does not require a Nonbank
Stand-Alone SBSD to post initial margin to its counterparties.
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\46\ 17 CFR 240.18a-3.
\47\ 17 CFR 240.18a-1.
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Pursuant to Section 3E(f) of the Exchange Act, a customer of a
Nonbank Stand-Alone SBSD can elect to have initial margin posted to the
firm held by a third-party custodian or waive segregation with respect
to the initial margin.\48\ In addition, a Nonbank Stand-Alone SBSD will
be subject to the omnibus segregation requirements of Rule 18a-4 with
respect to non-cleared security-based swaps.\49\ The omnibus
segregation requirements are the default requirement if the
counterparty does not elect to have initial margin held by a third-
party custodian or waive segregation.
---------------------------------------------------------------------------
\48\ See 15 U.S.C. 78c-5(f).
\49\ 17 CFR 240.18a-4.
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A Nonbank Stand-Alone SBSD, however, will be exempt from the
requirements of Rule 18a-4 if the firm meets certain conditions,
including that the firm: (1) Does not clear security-based swap
transactions for other persons; (2) provides notice to the counterparty
regarding the right to segregate initial margin at an independent
third-party custodian; (3) discloses to the counterparty in writing
that any collateral received by the Nonbank Stand-Alone SBSD will not
be subject to a segregation requirement; and (4) discloses to the
counterparty how a claim of the counterparty for the collateral would
be treated in a bankruptcy or other formal liquidation proceeding of
the Nonbank Stand-Alone SBSD.\50\
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\50\ 17 CFR 240.18a-4(f). Rule 18a-4 also has exceptions pursuant
to which a foreign stand-alone SBSD need not comply with the
segregation requirements (including the omnibus segregation
requirements) for certain transactions. 17 CFR 240.18a-4(e).
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C. Swap Dealers
The CFTC's margin rules impose initial and variation margin
requirements on covered swap dealers and covered major swap
participants for swap transactions (``covered swap entities'') that are
not cleared by a registered derivatives clearing organization.\51\ The
CFTC's initial margin rules require a covered swap dealer to both
collect and post initial margin on uncleared swap transactions entered
into with other swap dealers and with financial end-users with material
swaps exposure.\52\ CFTC margin rules require that initial margin be
calculated using a standardized table-based method or a model
(including an industry standard model).\53\ The initial margin model
must be approved by the CFTC or a registered futures association (i.e.,
National Futures Association).
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\51\ The CFTC's uncleared swap margin rules are codified in part 23
of the CFTC's regulations (17 CFR 23.150-23.161).
\52\ 17 CFR 23.152. The term ``material swaps exposure'' for an
entity means that the entity and its margin affiliates have an average
daily aggregate notional amount of uncleared swaps, uncleared security-
based swaps, foreign exchange forwards, and foreign exchange swaps with
all counterparties for June, July and August of the previous calendar
year that exceeds $8 billion, where such amount is calculated only for
business days.
\53\ 17 CFR 23.154.
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The CFTC's uncleared swap margin rules also establish minimum
standards for the safekeeping of collateral. The rules generally
require that initial margin collateral received or posted by the
covered swap entity must be held by one or more unaffiliated third-
party custodians.\54\ The rules also require the custodian to act
pursuant to a custodial agreement that is legal, valid, binding, and
enforceable under the laws of all relevant jurisdictions, including in
the event of bankruptcy, insolvency, or similar proceedings.\55\ The
custodial agreement must prohibit the custodian from re-hypothecating,
re-pledging, reusing, or otherwise transferring (through securities
lending, repurchase agreement, reverse repurchase agreement, or other
means) the funds or other property held by the custodian.\56\
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\54\ 17 CFR 23.157(a)-(b).
\55\ 17 CFR 23.157(c).
\56\ Id.
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III. Request for Comment
A. General Request for Comment
The Commissions request comment on all aspects of the portfolio
margining of uncleared swaps and non-cleared security-based swaps,
including on the merits, benefits, and risks of portfolio margining
these types of positions, and on any regulatory and operational issues
associated with portfolio margining them. The Commissions seek comment
on these matters generally and commenters are encouraged to address
matters related to portfolio margining not specifically identified in
the requests for comment below.
In responding to this general request for comment and on the
specific requests for comment below, the Commissions encourage
commenters to provide empirical support for their arguments and
analyses. Comments are of the greatest assistance to the Commissions
when accompanied by supporting data and analysis.
B. Specific Requests for Comment
1. Securities Account
The Commissions request comment on whether uncleared swaps,
noncleared security-based swaps, cash market securities positions,
listed securities options, OTC securities options, futures, options on
futures, and security futures should be permitted to be portfolio
margined in the following account types: (1) A securities account that
is subject to SRO portfolio margin rules; and (2) a securities account
that is subject to the initial margin requirements of Regulation T and
maintenance margin requirements of the SRO margin rules (i.e., a
securities account that is not subject to the SRO portfolio margin
rules). Commenters are asked to address the following matters.
Identify and describe the relative benefits of portfolio
margining in each of these securities account types, and
describe how the benefits compare to the benefits of other
account types discussed in this request for comment.
Identify and describe the risks of portfolio margining in
each of these securities account types, and describe how those
risks compare to the risks of other account types discussed in
this request for comment, as well as how the risks compare to
margining under the existing framework.
Identify and describe what models might be appropriate for
portfolio margining positions in each of these securities
account types, as well as the process for approving and
reviewing such models.
Identify and describe any regulatory issues associated with
portfolio margining in each of these securities account types,
including issues relating to (1) differences in the statutes
governing futures, options on futures, uncleared swaps, non-
cleared security-based swaps, and securities other than
security-based swaps, (2) differences in the regulatory
requirements of the CFTC, SEC, and SROs applicable to futures,
options on futures, uncleared swaps, non-cleared security-based
swaps, and securities other than security-based swaps
(including differences in margin and segregation requirements),
and (3) differences in the bankruptcy treatment of futures,
options on futures, uncleared swaps, noncleared security-based
swaps, and securities other than security-based swaps.
As discussed above, the CFTC's rules prohibit the re-
hypothecation of initial margin collateral. The SEC's rules
permit limited re-hypothecation of initial margin collateral
received from customers or counterparties. Discuss the
potential implications of the differences in the Commissions'
approaches to the re-hypothecation of initial margin collateral
relevant to a portfolio margin scheme.
Section 16 of SIPA defines the terms ``customer,''
``customer property,'' and ``net equity'' to include
securities, futures, and options on futures, but not swaps or
security-based swaps.\57\ The Commissions request comment on
steps broker-dealers (including broker-dealers that are SBSDs)
can take to ensure the protections afforded by SIPA will apply
to all positions held in a securities account. Comment also is
sought on the types of disclosures broker-dealers and SBSDs can
make to their portfolio margin account-holders about positions
in a securities account that are not within the SIPA
definitions of ``customer,'' ``customer property,'' and ``net
equity.'' Comment also is sought on the expectations of market
participants as to whether the initial margin and accrued gains
associated with uncleared swaps and non-cleared security-based
swaps held in a portfolio margin account that is a securities
account is subject to SIPA protection in the event of the
insolvency of the broker-dealer.
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\57\ Section 983 of the Dodd-Frank Act amended Section 16 of SIPA
to define the term ``customer'' to include a person that has a claim
for futures and options on futures, and to define the term ``customer
property'' to include futures and options on futures, in each case
where they are held in a portfolio margining account carried as a
securities account pursuant to a portfolio margining program approved
by the SEC. Section 3(a)(10) of the Exchange Act defines the term
``security'' to include a security-based swap for purposes of the
Exchange Act. 15 U.S.C[.] 78c(a)(10).
As noted above, the CFTC margin rules require swap dealers
to post initial margin for uncleared swaps entered into with
other swap dealers or with financial end-users with material
swaps exposure. The SEC's margin rules permit, but do not
require, an SBSD to post initial margin for non-cleared
security-based swaps entered into with other broker-dealers,
SBSDs, swap dealers, or financial end-users. How should the
Commissions address the differences in the initial margin
posting requirements in a portfolio margin account? If
portfolio margining resulted in the transfer of significant
swap trading relationships to SBSDs, which would operate under
a ``collect only'' regime, would that increase the potential
for counterparty risk, including liquidity mismatches between
counterparties? Alternatively, would it lower systemic risk by
promoting the liquidity of SBSDs? Discuss the potential impact
on the markets and market participants if entities registered
as broker-dealers and swap dealers or as broker-dealers, SBSDs,
and swap dealers are not required to post initial margin to
counterparties for uncleared swaps held in a portfolio margin
account while stand-alone swap dealers are required to post
initial margin to counterparties for uncleared swap
transactions. Should the Commissions require entities
registered as broker-dealers and swap dealers or as broker-
dealers, SBSDs, and swap dealers to post margin for uncleared
swaps held in a portfolio margin account with covered
counterparties? How should such margin be computed? Would
requiring these entities to post margin undermine the benefits
of portfolio margining? Would it increase costs to customers to
compensate these entities for having to use their capital to
meet margin requirements? In addition, would requiring these
entities to post initial margin create a barrier to entry for
smaller firms that do not have the resources to post initial
---------------------------------------------------------------------------
margin?
If portfolio margining resulted in the transfer of
significant swap trading relationships to broker-dealer SBSDs,
which would operate under a ``collect only'' regime, how would
this impact the risks customers face in the event of an SBSD's
default? How should the Commissions balance the relative
concerns related to trying to enhance liquidity of SBSDs while
ensuring customer protection? Are there any lessons to be
learned from events impacting swap markets during the recent
COVID market volatility?
Identify and describe any operational issues associated with
portfolio margining in each of these securities account types.
SIPA defines the term ``customer'' to include a person that
has a claim for futures and options on futures, and defines the
term ``customer property'' to include futures and options on
futures, in each case where they are held in a portfolio
margining account carried as a securities account pursuant to a
portfolio margining program approved by the SEC. The
Commissions request specific comment on any legal and
operational issues associated with holding futures and options
on futures in a portfolio margin account that is a securities
account.
As discussed above, an entity that effects transactions in
securities must be registered with the SEC as a broker-dealer.
A broker-dealer that limits securities dealing to OTC equity
options and other OTC derivatives can operate as a special
purpose broker-dealer known as OTC derivatives dealer. An
entity that deals in security-based swaps above a de minimis
notional threshold will need to register with the SEC as an
SBSD. An entity that deals in swaps above a de minimis notional
threshold must register with the CFTC as a swap dealer. And, an
entity that clears futures, or options on futures, or swaps for
customers must register as an FCM. Please discuss any
regulatory or operational issues raised by portfolio margining
in each securities account type in light of these and any other
relevant registration requirements.
Discuss how the Commissions could implement portfolio margin
requirements for each securities account type, including
potential relief the Commissions could provide to address
regulatory and operational issues associated with portfolio
margining in each securities account type.
Identify and describe any conditions the Commissions should
consider with respect to portfolio margining in each securities
account type to mitigate risk and address regulatory and
operational issues.
Identify the categories of futures, options on futures,
uncleared swaps, non-cleared security-based swaps, and
securities (other than security-based swaps) that should be
permitted to be portfolio margined in each securities account
type and discuss why they should be included and, if
applicable, why other categories of these instruments should be
excluded.
Discuss whether market participants would be likely to use
either of these securities account types to portfolio margin
futures, options on futures, uncleared swaps, non-cleared
security-based swaps, cash market securities positions, listed
securities options, and OTC securities options, and explain why
they would or would not use the securities account type.
Identify and describe the potential costs and benefits, as
well as the competitive impact--either positive or negative--of
permitting market participants to portfolio margin futures,
options on futures, uncleared swaps, non-cleared security-based
swaps, cash market securities positions, listed securities
options, OTC securities options, and security futures in either
of these securities account types. Please quantify, including
by way of example, these potential costs, benefits and impacts
to the extent practicable.
2. Security-Based Swap Account
The Commissions request comment on whether non-cleared security-
based swaps, uncleared swaps, and OTC securities options (if the firm
is registered as an OTCDD/SBSD) should be permitted to be portfolio
margined in a security-based swap account. Commenters are asked to
address the following matters.
Identify and describe the relative benefits of portfolio
margining in a security-based swap account, and describe how
the benefits compare to the benefits of other account types
discussed in this request for comment, as well as how the risks
compare to margining under the existing framework.
Identify and describe the risks of portfolio margining in a
security-based swap account, and describe how those risks
compare to the risks of other account types discussed in this
request for comment.
Identify and describe what models might be appropriate for
portfolio margining positions in a security-based swap account,
as well as the process for approving and reviewing such models.
Identify and describe any regulatory issues associated with
portfolio margining in a security-based swap account, including
issues relating to (1) differences in the statutes governing
uncleared swaps, non-cleared security-based swaps, and
securities other than security-based swaps, (2) differences in
the regulatory requirements of the CFTC, SEC, and SROs
applicable to uncleared swaps, non-cleared security-based
swaps, and securities other than security-based swaps
(including differences in margin and segregation requirements),
and (3) differences in the bankruptcy treatment of uncleared
swaps, non-cleared security-based swaps, and securities other
than security-based swaps.
The Dodd-Frank Act amended section 3E(g) of the Exchange Act
to provide that a security-based swap shall be considered a
``security'' as the term is used in a stockbroker liquidation
under Subchapter III of title 11 of the U.S. bankruptcy code
(11 U.S.C. 741-753). Section 3E(g) was not amended to provide
that a swap shall be considered a ``security'' as the term is
used in a stockbroker liquidation under Subchapter III of title
11 of the U.S. bankruptcy code. Section 3E(g) of the Securities
Exchange Act also provides that the term ``customer'' as
defined in section 741 of title 11 of the U.S. bankruptcy
code, excludes any person to the extent that such person has a
claim based on a non-cleared option or non-cleared security-
based swap except to the extent of margin delivered to or by
the customer with respect to which there is a customer
protection requirement under Section 15(c)(3) of the Exchange
Act or a segregation requirement. The Commissions request
specific comment on steps SBSDs can take to ensure the
protections afforded by the stockbroker liquidation provisions
will apply to positions held in a security-based swap account,
including swaps and accrued gains on open options and non-
cleared security-based swaps. What are the implications for
customer protection? Can those implications be mitigated? If
so, how?
Comment also is sought on the types of disclosures SBSDs can
make to their portfolio margin account-holders about positions
in a security-based swap account that are not within the
definitions of ``customer,'' ``customer property,'' and ``net
equity'' in the stockbroker liquidation provisions of the U.S.
bankruptcy code. Comment also is sought on the expectations of
market participants as to the extent to which customer claims
in a stockbroker liquidation under the U.S. bankruptcy code
include property held to margin swaps or accruing to the
customer as a result of swap transactions in a portfolio
margining account held in a security-based swap account.
As noted above, the CFTC margin rules require swap dealers
to post initial margin for uncleared swaps entered into with
other swap dealers or with financial end-users with material
swaps exposure. The SEC's margin rules permit, but do not
require, an SBSD to post initial margin for non-cleared
security-based swaps entered into with other broker-dealers,
SBSDs, swap dealers, or with financial end-users. How should
the Commissions address the differences in the initial margin
posting requirements in a portfolio margin account? If
portfolio margining resulted in the transfer of significant
swap trading relationships to SBSDs, which would operate under
a ``collect only'' regime, would that increase the potential
for risk and liquidity mismatches between counterparties?
Alternatively, would it lower systemic risk by promoting the
liquidity of SBSDs? Discuss the potential impact on the markets
and market participants if entities registered as SBSDs and
swap dealers are not required to post initial margin to
counterparties for uncleared swaps held in a portfolio margin
account while stand-alone swap dealers are required to post
initial margin to counterparties for uncleared swap
transactions. Should the Commissions require entities
registered as SBSDs and swap dealers to post margin for
uncleared swaps held in a portfolio margin account with covered
counterparties? How should such margin be computed?
Alternatively, would requiring these entities to post margin
undermine the benefits of portfolio margining? Would it
increase costs to customers to compensate these entities for
having to use their capital to meet margin requirements? In
addition, would requiring these entities to post initial margin
create a barrier to entry for smaller firms that do not have
the resources to post initial margin?
If portfolio margining resulted in the transfer of
significant swap trading relationships to Nonbank Stand-Alone
SBSDs, which would operate under a ``collect only'' regime, how
would this impact the risks customers face in the event of an
SBSD's default? How should the Commissions balance the relative
concerns related to trying to enhance liquidity of SBSDs while
ensuring customer protection? Are there any lessons to be
learned from events impacting swap markets during the recent
COVID market volatility?
Identify and describe any operational issues associated with
portfolio margining in a security-based swap account.
As discussed above, an entity that effects transactions in
securities must be registered with the SEC as a broker-dealer.
A broker-dealer that limits securities dealing to OTC equity
options and other OTC derivatives can operate as special
purpose broker-dealer known as OTC derivatives dealer. An
entity that deals in security-based swaps above a de minimis
notional threshold will need to register with the SEC as an
SBSD. And, an entity that deals in swaps above a de minimis
notional threshold must register with the CFTC as a swap
dealer. Please discuss any regulatory or operational issues
raised by portfolio margining in a security-based swap account
in light of these and any other relevant registration
requirements.
Discuss how the Commissions could implement portfolio margin
requirements for a security-based swap account, including
potential relief the Commissions could provide to address
regulatory and operational issues associated with portfolio
margining in a security-based swap account.
Identify and describe any conditions the Commissions should
consider with respect to portfolio margining in a security-
based swap account to mitigate risk and address regulatory and
operational issues.
Identify the categories of uncleared swaps, non-cleared
security-based swaps, and OTC securities options (if the firm
is registered as an OTC derivatives dealer) that should be
permitted to be portfolio margined in the security-based swap
account and discuss why they should be included and, if
applicable, why other categories of these instruments should be
excluded.
Discuss whether market participants would use a security-
based swap account to portfolio margin uncleared swaps, non-
cleared security-based swaps, and OTC securities options (if
the firm is registered as an OTCDD/SBSD) and explain why they
would or would not use this account type for this purpose.
Identify and describe the potential costs and benefits, as
well as the competitive impact--either positive or negative--of
permitting market participants to portfolio margin noncleared
security-based swaps, uncleared swaps, and OTC securities
options (if the firm is registered as an OTCDD/SBSD) in a
security-based swap account. Please quantify, including by way
of example, these potential costs, benefits and impacts to the
extent practicable.
3. Swap Account
The Commissions request comment on whether uncleared swaps and
noncleared security-based swaps should be permitted to be portfolio
margined in a swap account. Commenters are asked to address the
following matters.
Identify and describe the relative benefits of portfolio
margining in a swap account, and describe how the benefits
compare to the benefits of other account types discussed in
this request for comment.
Identify and describe the risks of portfolio margining in a
swap account, and describe how those risks compare to the risks
of other account types discussed in this request for comment,
as well as how the risks compare to margining under the
existing framework.
Identify and describe what models might be appropriate for
portfolio margining positions in a swap account, as well as the
process for approving and reviewing such models.
Identify and describe any regulatory issues associated with
portfolio margining in a swap account, including issues
relating to (a) differences in the statutes governing uncleared
swaps, non-cleared security-based swaps, and securities other
than security-based swaps, (b) differences in the regulatory
requirements of the CFTC, SEC, and SROs applicable to uncleared
swaps, non-cleared security-based swaps, and securities other
than security-based swaps (including differences in margin and
segregation requirements), and (c) differences in the
bankruptcy treatment of uncleared swaps, non-cleared security-
based swaps, and securities other than security-based swaps.
As noted above, the CFTC margin rules require swap dealers
to post initial margin for uncleared swaps entered into with
other swap dealers or with financial end-users with material
swaps exposure. The SEC's margin rules permit, but do not
require, an SBSD to post initial margin for non-cleared
security-based swaps entered into with other broker-dealers,
SBSDs, swap dealers, or with financial end-users. How should
the Commissions address the differences in the initial margin
posting requirements in a portfolio margin account? If
portfolio margining resulted in the transfer of significant
swap trading relationships to SBSDs, which would operate under
a ``collect only'' regime, would that increase the potential
for risk and liquidity mismatches between counterparties? How
do commenters view any systemic risk implications of SBSDs not
posting initial margin? Would it lower systemic risk by
promoting the liquidity of SBSDs? Discuss the potential impact
on the markets and market participants if entities registered
as broker-dealers and swap dealers or as broker-dealers, SBSDs,
and swap dealers or as SBSDs and swap dealers are not required
to post initial margin to counterparties for uncleared swaps
held in a portfolio margin account while stand-alone swap
dealers are required to post initial margin to counterparties
for uncleared swap transactions. Would such a portfolio
margining approach provide a disincentive for customers to
trade with stand-alone swap dealers and what would be the
potential market impact of such a disincentive? Should the
Commissions require entities registered as broker-dealers and
swap dealers or as broker-dealers, SBSDs, and swap dealers or
as SBSDs and swap dealers to post margin for uncleared swaps
held in a portfolio margin account with covered counterparties?
How should such margin be computed? Alternatively, would
requiring these entities to post margin undermine the benefits
of portfolio margining? Would it increase costs to customers to
compensate these entities for having to use their capital to
meet margin requirements? In addition, would requiring these
entities to post initial margin create a barrier to entry for
smaller firms that do not have the resources to post initial
margin?
As discussed above, an entity that effects transactions in
securities must be registered with the SEC as a broker-dealer.
A broker-dealer that limits securities dealing to OTC equity
options and other OTC derivatives can operate as special
purpose broker-dealer known as OTC derivatives dealer. An
entity that deals in security-based swaps above a de minimis
notional threshold will need to register with the SEC as an
SBSD. And, an entity that deals in swaps above a de minimis
notional threshold must register with the CFTC as a swap
dealer. And, an entity that clears futures, options on futures,
or swaps for customers must register as an FCM. Please discuss
any regulatory or operational issues raised by portfolio
margining in a swap account in light of these and any other
relevant registration requirements.
Identify and describe any operational issues associated with
portfolio margining in a swap account.
Discuss how the Commissions could implement portfolio margin
requirements for a swap account, including potential relief the
Commissions could provide to address regulatory and operational
issues associated with portfolio margining in a swap account.
Identify and describe any conditions the Commissions should
consider with respect to portfolio margining in a swap account
to mitigate risk and address regulatory and operational issues.
Identify the categories of swaps and security-based swaps
that should be permitted to be portfolio margined in the swap
account and discuss why they should be included and, if
applicable, why other categories of these instruments should be
excluded.
Discuss whether market participants would use a swap account
to portfolio margin uncleared swaps and non-cleared security-
based swaps, and explain why they would or would not use this
account type for this purpose.
Identify and describe the potential costs and benefits, as
well as the competitive impact--either positive or negative--of
permitting market participants to portfolio margin uncleared
swaps and non-cleared security-based swaps in a swap account.
Please quantify, including by way of example, these potential
costs, benefits and impacts to the extent practicable.
4. Other Potential Portfolio Margin Scenarios
In addition to the requests for comment on the specific account
types discussed above, the Commissions request comment on whether there
are any other potential portfolio margin scenarios with regard to
uncleared swaps, non-cleared security-based swaps, and other related
positions that the Commissions should consider at this time. Commenters
should identify and describe the specific products and account type
involved in any other potential portfolio margin alternatives.
Commenters also are asked to address any potential regulatory or
operational issues involving a particular portfolio margin scenario.
Finally, commenters should address any potential costs and benefits and
competitive impact the Commissions should consider in evaluating a
particular portfolio margin scenario.
By the Securities and Exchange Commission.
Dated: October 22, 2020.
Vanessa A. Countryman,
Secretary.
Issued in Washington, DC, on October 23, 2020, by the Commodity
Futures Trading Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--CFTC Voting Summary and
Commissioner's Statement
Appendix 1--CFTC Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner
voted in the negative.
Appendix 2--Supporting Statement of CFTC Commissioner Brian Quintenz
I am proud to support today's request for comment, which marks the
beginning of the agencies' consideration of ways to implement a
portfolio margining regime for uncleared swaps and non-cleared
security-based swaps. Portfolio margining can lead to efficiencies in
margin calculation by appropriately accounting for the impact
offsetting positions have on a portfolio's actual risk profile. This,
in turn, gives firms and customers additional capital that can be
deployed elsewhere. However, given the differences between the
regulatory regimes for swaps and security-based swaps, it also
implicates incredibly important legal and policy considerations. This
request for comment solicits critical feedback from market participants
on how portfolio margining could impact the safety and soundness of
firms, result in competitive advantages for certain types of
registrants, and raise questions about how collateral would be treated
in the event of bankruptcy. In order to make an informed decision about
if, and how, portfolio margining should be implemented for uncleared
swaps and noncleared security-based swaps, we need thoughtful feedback
on these complex questions. I encourage all interested parties to
provide written comments, including data wherever possible, in order to
further the agencies' understanding of the various options presented in
the request for comment.
[FR Doc. 2020-23928 Filed 11-4-20; 8:45 a.m.]
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