March 7, 2018

House Appropriations Agriculture Subcommittee FY19 Budget Hearing – Commodity Futures Trading Commission

Key Takeaways

• Bitcoin/Crypto Assets: Subcommittee Chairman Robert Aderholt (R-Ala.) asked about the role the CFTC plays in governing the Bitcoin spot and futures markets. Commodity Futures Trading Commission’s (CFTC’s) Chairman Christopher Giancarlo said that while the CFTC’s authority over the spot market is limited to enforcement actions, it has asserted its legal authority over the well-regulated and transparent Bitcoin futures market. Rep. Rosa DeLauro (D-Conn.) asked why CFTC staff is diverting time and funds towards Bitcoin if it has had only a small effect on financial markets and only effects a small population of Americans. Giancarlo responded that Bitcoin is a commodity, and therefore the CFTC has a statutory mandate to bring enforcement actions against fraudsters, especially since many younger Americans are involved in the Bitcoin market.
• Swap Dealer De Minimis Levels: Rep. Andy Harris (R-Md.) asked why the effective date of the reduction of the swap dealer de minimis levels from $8 billion to $3 billion was delayed. Giancarlo responded that the reason for the delay is that any change will need a Commission vote, and because of the vast amount of data that needs to be analyzed prior to making any change. However, Giancarlo noted that he expects this to be done within the next couple of months due to the addition of two new Commissioners.
• Cybersecurity: Reps. Mark Pocan (D-Wis.) and Chellie Pingree (D-Maine) asked similar questions about whether the current budget proposal was necessary for the CFTC’s cybersecurity effort. Giancarlo said the budget is necessary because of the new issues facing the CFTC that were not addressed in Dodd-Frank. He continued that the Commission is focused on using funds to address widespread digitization of markets, fund the Lab CFTC program aimed at growing internal knowledge, and to upgrade swap data repositories (SDRs) to handle the enormous amount of data they collect.
• Initial Margin Requirements: Aderholt asked why the initial margin requirements put in place by the prudential regulators were not first required by the CFTC. Giancarlo responded that the prudential regulators are outliers in global markets, and the CFTC believes the enhancement of systemic stability resulting from the requirements is far outweighed by the competitive disadvantage American firms face while operating in global markets. 

Witness

• The Honorable J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission 

Opening Statements

Subcommittee Chairman Robert Aderholt (R-Ala.), House Appropriations Committee, Agriculture Subcommittee

In his opening statement, Aderholt began by laying out the goals of the Agriculture Subcommittee which included: prosperity and the economic wellbeing of farm America and the rural economy, conducting fair and transparent oversight of agency activities and use of public resources, promoting economic growth through effective and efficient regulation, and protecting the health and safety of people, plants, and animals. Aderholt stated that the CFTC requested $281.5 million and the Commission’s request is mostly in line with the President’s, except for the use of user fees to fund a portion of the CFTC’s budget. Moreover, Aderholt encouraged the CFTC to use budgeted funds to invest in technology to allow for innovation in the marketplace, and to evaluate the current method for sizing swaps markets.

Ranking Member Sanford Bishop (D-Ga.), House Appropriations Committee, Agriculture Subcommittee

In his opening statement, Bishop began by commenting on the relevance of the CFTC for both farmers and financial institutions in using products to hedge risk. Further, Bishop emphasized the damaging effect of the great recession and warned against unraveling Dodd-Frank and the protections it has provided for the financial system, and thanked Chairman Giancarlo for reaching across the aisle to work with him and other legislators to prevent the unraveling of the bill.

Testimony

The Honorable J. Christopher Giancarlo, Chairman, U.S. Commodity Futures Trading Commission

In his opening statement, Giancarlo stated that in order to properly oversee derivatives markets in fiscal year (FY) 2019, the Commission is requesting $281.5 million and 716 full-time equivalents, which is the same level of funding that the Commission requested in FY 2018. Giancarlo said that the budget reflects the need to oversee new technological advances that are transforming the way market participants deal and interact in a complex derivatives market, noting that with innovation comes new security concerns, new products that need oversight, and new financial technology that has prompted the Commission to rethink outdated regulations.

Questions & Answer

Bitcoin/Crypto Assets

Aderholt asked if Giancarlo could speak on the role the CFTC plays in regulating the Bitcoin and crypto asset market that has dominated the press over the last year. Giancarlo said that while the CFTC’s authority over the spot market is limited to enforcement actions, it has asserted its legal authority over the well-regulated and transparent Bitcoin futures market. He added that asserting legal authority is one part of a six-fold approach to crypto assets that also includes: educating consumers and CFTC staff, interagency cooperation, and aggressive enforcement against fraud.

Rep. Rosa DeLauro (D-Conn.) asked why CFTC staff is diverting time and funds towards Bitcoin if it has had only a small effect on financial markets and only effects a small population of Americans. Further, DeLauro suggested that those funds and time should be spent preventing the unwinding of Dodd-Frank, a bill that effects most Americans. Giancarlo responded that funds and attention should be spend on this area of the market because Americans, particularly young Americans, are being targeted by scammers in this market and Bitcoin is a commodity within the authority of the CFTC which cannot be ignored.

Sizing of the Swaps Markets

Aderholt asked if Giancarlo could explain the difference between notional value and the new metrics currently being developed by the CFTC to size risk in the swaps market. Giancarlo explained that the CFTC Chief Economist recently published a paper that suggested the use of Entity Netted Notionals (ENNs) that factor in netted positions of market participants in the swaps market. As an example, Giancarlo pointed to the Interest Rate Swaps (IRS) market and noted that under the current measurement the size of the IRS market is $179 trillion; however, under the ENN measurement the IRS market was measured at $15 trillion, which is comparable to other markets. Further, Chairman Giancarlo noted that there are good uses for ENN, but it does not address every issue and the CFTC Chief Economist’s paper is just the “first word” on creating a true risk measurement.

User Fees

Bishop asked whether Giancarlo supports using user fees to fund a portion of the CFTC’s budget. Giancarlo responded by drawing a distinction between user fees and transaction fees, stating that he has long opposed transaction fees because they provide a tax on the use of risk hedging markets, and that will effect both financial institutions and farmers. Giancarlo’s opposition to the use of user funds was supported by Rep. Kevin Yoder (R-Kan.), who added that user fees might push farmers into taxpayer-funded options.

Swaps Dealer De Minimis Levels

Harris asked why the effective date of the reduction of the swap dealer de minimis levels from $8 billion to $3 billion was delayed. Giancarlo responded that the reason for the delay is that any change will need a Commission vote, and because the amount of data that needs to be analyzed before making any change is vast. However, Giancarlo remarked that because of the addition of two new Commissioners, he expects this to be done within the next couple of months. Harris also asked whether it is a good idea to keep the de minimis levels at $8 billion, and Giancarlo responded that he wants to get a unanimous decision by the Commissioners on the issue.

Cybersecurity

Reps. Mark Pocan (D-Wis.) and Chellie Pingree (D-Maine) asked similar questions about whether the current budget proposal was necessary for the CFTC’s cybersecurity effort. Giancarlo said the budget is necessary because of the new issues facing the CFTC that were not addressed in Dodd-Frank. He explained that currently, the Commission is focused on using funds to address widespread digitization of markets and funding the Lab CFTC program to grow internal knowledge. Further, the Chairman referenced a FISMA cybersecurity risk assessment report that ranked the CFTC higher than the Securities Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), and Treasury despite having a significantly smaller budget.

Rep. David Valadao (R-Calif.) asked whether the CFTC is modernizing their information technology (IT) system and how their IT system compares to market participants around the world. Giancarlo emphasized that a core mandate of Title VII was greater transparency through the collection of data and cited that swap data repositories (SDRs) are key to Title VII’s goals. Moreover, he explained that the CFTC intends to use this budget to upgrade those key systems to handle the enormous amount of data collected and increase automation of those systems.

Risk Assessment

Yoder asked whether the plan at the Federal Reserve to replace the current exposure method (CEM) with the Standardized Approach to Counterparty Credit Risk (SA-CCR) through rulemaking would be too lengthy of a process to make those changes given increased volatility in the markets this year. Giancarlo responded by stating that during the recent volatility in February, there was some evidence to suggest the current form of the Supplemental Leverage Ratio (SLR) impacted the ability of larger market markets to take on positions, which in turn exacerbated market movement. The Chairman also commented that the SLR approach deters moving products to clearing, which undermines the ultimate policy goal of Dodd-Frank. Furthermore, Giancarlo understood that despite the need for change, the process takes time.

Cross-border Engagement

Pingree asked whether the CFTC is in communication with European and Asian counterparts, to which Giancarlo said that relationships with international counterparts are extremely important and the Commission fully supports the G20 efforts. He continued that his concern is that post-Brexit, the EU Parliament will undertake legislation and it is unclear whether that legislation will undermine the 2016 Equivalency Determination on central counterparty (CCP) supervision. Further, the Chairman emphasized that he has testified in Europe and was clear to the EU Commission that he expects the Equivalency Determinations to be upheld.

Initial Margin Requirements                              

Aderholt asked why the initial margin requirements put in place by the prudential regulators were not first required by the CFTC. Giancarlo responded that the prudential regulators are outliers in global markets, and the CFTC believes the enhancement of systemic stability resulting from the requirements is far outweighed by the competitive disadvantage American firms face while operating in global markets. 

Self-Certification Process

Bishop asked whether the CFTC should consider changes to its self-certification process. Giancarlo said that he believes the process is effective and supported that assertion by citing the self-certification of 12,000 new products over two decades without an issue. However, Giancarlo noted that the CFTC is reviewing the process and suggested the Commission may add a new heightened review to their guidance, and in addition, the Commission’s Market Risk Advisory Committee (MRAC) will explore potential adjustments to the process. 

Algorithmic Trading

Rep. David Young (R-Iowa) asked whether the CFTC has the ability to balance overseeing fundamental market users and algorithmic trades, and whether the CFTC is currently achieving that balance. Giancarlo emphasized that to achieve that balance the CFTC needs to first understand the changes in the market, then policy change can be made. He remarked that diversity of market participants is not necessarily the cause of recent market volatility and is vital for a growing and diverse market.

For more information on this hearing, click here.