June 8, 2017
House Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies: Commodity Futures Trading Commission – Budget Hearing
Key Topics & Takeaways
- CFTC’s Budget: Acting Chair Giancarlo described the detailed process by which the Commission came to its budget request, based on a careful assessment of what the CFTC needs to execute its regulatory mission. He specifically highlighted a few key areas where additional resources were required, including the ability to conduct more thorough cost-benefit analyses, clearinghouse oversight and examinations, and keeping pace with emerging technologies in financial markets.
- Supplemental Leverage Ratio: Rep. Yoder expressed concerns with the Supplemental Leverage Ratio (SLR), which he stated has caused access and liquidity issues, and queried how the CFTC was working with fellow regulators to resolve problems. Giancarlo stated that the Supplemental Leverage Ratio (SLR) is part of the futures commission merchants (FCMs) consolidation problem, arguing that despite the fact that the central clearing of swaps was a core reform priority, SLR penalizes this activity.
- Global Markets: When asked how Brexit would impact the Commission given the likely impact to commodity trading markets, Giancarlo stated that clearing fragmentation risk is detrimental to global markets, and that Brexit may have tremendous ramifications, depending on how negotiations go.
- J. Christopher Giancarlo, Acting Chair, Commodity Futures Trading Commission
Rep. David Valadao (R-Calif.) highlighted the Subcommittee’s main considerations for the appropriations process, which include careful use of taxpayer dollars, investment in rural America, supporting the agricultural industry and protecting the environment. Valadao then noted that he was optimistic about the direction of the Commodity Futures Trading Commission (CFTC), as it has expressed the intent to achieve the right mix of regulation and economic growth, including dedication to financial technology.
Subcommittee Ranking Member Sanford Bishop (D-Ga.) noted that the CFTC’s budget request of $281.5 million for FY 2018 was lower than recent past requests, but still a significant increase from the $250 million budget it received last year. Bishop went on to say it is important for the CFTC to be able to conduct its duties as the “first responder” for an important financial market.
- Christopher Giancarlo, Acting Chair, CFTC
Acting Chair Giancarlo opened his testimony stressing the importance of derivatives markets, as they provide a forum for end-users to hedge risks and free up capital, and further “boost economic growth, job creation and American prosperity.” He explained, however, that the current state of America’s derivatives markets “are more fragmented, more concentrated, less liquid and less supportive of economic growth and renewal than in the past.” This, he stated, can be attributed to overly prescriptive regulation.
Giancarlo next described the detailed process by which the Commission came to its budget request of $281.5 million (a $31.5 million increase from the past year’s budget), explaining that the number came from a careful assessment of what the CFTC needs to execute its regulatory mission. He specifically highlighted a few key areas where additional resources were required, including the ability to conduct more thorough cost-benefit analyses, clearinghouse oversight and examinations, and keeping pace with emerging technologies in financial markets. Giancarlo highlighted the CFTC’s recent announcement of LabCFTC as one such effort towards keeping pace with technology. He then expressed that “[t]he U.S. derivatives markets should be neither the most regulated nor the least regulated of the world—but the best regulated.”
Valadao asked how the CFTC would measure the its performance, noting that past leadership focused on enforcement, and further queried how the CFTC is responding to the recent Executive Order 13777 issued by President Trump. Giancarlo stated that he believed the Commission’s success should be measured on whether the U.S. derivatives markets attracted the world’s capital, reiterating his goal to make these markets the best regulated and most stable (similar to how the U.S. is able to attract IPOs). Regarding President Trump’s Executive Order, Giancarlo explained that it is necessary to take a step back to review Commission rules, regulations and requirements, highlighting the Commissions Project KISS initiative as a step towards such an effort. Giancarlo pointed out the CFTC’s recent review of its recordkeeping rule sought to update outdated technology requirements to make them more “technology neutral.”
Rep. Mark Pocan (D-Wis.) asked that, if regulation has trended to be overly-prescriptive in Giancarlo’s view, how the Commission would look to better regulate. Giancarlo emphasized his support for Title VII reform efforts, explaining that with the regulations these markets are better, but can still be more stable and vibrant.
Bishop asked how the CFTC was responding to President Trump’s Executive Order, and whether the Commission had appointed a regulatory reform officer as required by the Order. Giancarlo explained that while the CFTC is an independent agency and not technically bound by the Order, they are complying in spirit as evidenced by Project KISS. Giancarlo further expressed support for Title VII reform, and pointed out that the CFTC budget request seeks to bolster the Commission’s oversight capabilities. He noted, however, that even his predecessor at the Commission agreed that fine tuning of requirements was necessary. Giancarlo stated that he hoped to focus on getting reform right, and being prepared for the future.
Bishop asked whether the CFTC’s budget request to improve technology would be put to good use, as often times such requests by government agencies do not end up a good “return on investment.” Giancarlo stated that the CFTC has been very deliberative in determining its technology needs, engaging in an extensive “internal specification process,” which includes substantive dialogue between interested parties within the Commission and includes written documentation to ensure accountability. Giancarlo stressed that no technology builds would happen within the Commission without this specification process, and any request is based on real, hard numbers.
Rep. Steven Palazzo (R-Miss.) asked how the CFTC’s budget request covered human resources and staffing. Giancarlo explained that in addition to technology tools, the Commission would seek to hire individuals for roles in the areas of FinTech/LabCFTC, Office of the Chief Economist and for clearinghouse examination teams. Giancarlo stressed that the CFTC must be forward looking in how it deploys resources, and thus it is especially important to keep up with advancements in technology, which would require both human and technological resources – which are built in to the requested budget.
Palazzo next asked how Giancarlo sees FinTech and blockchain developing, and questioned whether the U.S. was keeping pace with international counterparts in this space. Giancarlo explained that while U.S. innovators remain unmatched, the U.S. government is behind its international counterparts. He noted that other regulators are more advanced in embracing financial innovation, citing the UK as a leader via its “Project Innovate” initiative which encourages FinTech innovation, including blockchain. Giancarlo again highlighted LabCFTC as a step in the right direct, explaining that the Commission’s goal will be to facilitate and foster innovation.
Bishop queried progress the Commission was making in improving diversity hiring, and whether the budget request contemplated this. Giancarlo noted that the CFTC has taken steps to recruit minorities and women as part of a paid internship program. He further agreed with Bishop that this internship program should serve as a base for full-time hiring.
Valadao asked whether an enforcement manual would help to provide more clarity and transparency to market participants. Giancarlo explained that enforcement is one of the key roles of the CFTC, and stated that he supported past initiatives to put forward guidelines for cooperation agreements.
Rep. Rosa DeLauro (D-Conn.) stated that past underfunding of the Commission was a mistake, and expressed support for more funding. DeLauro asked Giancarlo to provide specifics on how CFTC regulations have held back growth. Giancarlo provided one example, explaining that the number of futures commission merchants in the market has dwindled from 157 to about 50 since 2006, making it very difficult to service the same number of market participants – especially smaller consumers.
Supplemental Leverage Ratio
Rep. Kevin Yoder (R-Kan.) emphasized the need for carefully crafted regulations which avoid reductions in liquidity and harming consumers. He specifically expressed concerns with the Supplemental Leverage Ratio (SLR), which he stated has caused access and liquidity issues. Yoder queried how the CFTC was working with fellow regulators to resolve problems. Giancarlo again highlighted consolidation issues impacting futures commission merchants (FCMs), explaining that smaller consumers are left with nowhere to go in many instances. Giancarlo stated that SLR is part of the FCM consolidation problem, arguing that despite the fact that the central clearing of swaps was a core reform priority, SLR penalizes this activity. Giancarlo stated that the CFTC has estimated that if SLR were reformed in some key ways, such changes could free up to 70 percent of capital for use by smaller market participants currently unable to get adequate trading liquidity. Giancarlo expressed his hope that the other agencies would see fit to make amendments.
Rep. David Young (R-Iowa) asked if the CFTC would be able to develop a better method to measure actual risk, as opposed to notional measurements as currently utilized. Giancarlo explained that the Office of the Chief Economist would consider ways to develop a better understanding of risk in the financial system.
De Minimis Threshold
Subcommittee Chairman Robert Aderholt (R-Ala.) expressed concerns regarding potential impact to smaller market participants if the CFTC’s swap dealer de minimis threshold drops from $8 billion to $3 billion, noting that the CFTC has completed two studies which support maintaining the $8 billion threshold or raising it higher. Adherholt explained he saw no benefit to a drop in the threshold, as it would only serve to capture smaller market participants and end-users that would not be able to handle the regulatory burdens imposed by swap dealer registration. Giancarlo stated that the threshold currently captures “Wall Street” firms, and a drop in that threshold would find end-users of derivatives, such as utilities, captured. He explained that such entities would not find registration feasible, and instead a reduction would only result in a drop in trading activity, leading to a loss of liquidity for smaller market participants.
Bishop asked how Brexit would impact the Commission, given the likely impact to commodity trading markets. Giancarlo stated that clearing fragmentation risk is detrimental to global markets, and that Brexit may have tremendous ramifications, depending on how negotiations go. For example, a possible outcome could result in LCH relocating clearing for euro-denominated swaps to the continental EU, which would be especially concerning if resulting in any knock-on impact to clearing paradigms in the U.S. Giancarlo expressed his hope that negotiations would result in a workable outcome.
Bishop next questioned whether user fees might be a source of CFTC funding. Giancarlo noted the market the CFTC oversees is different from other agencies, and pointed out that market participants already pay user fees to the National Futures Association. He also cautioned that market participants in this space have seen a dramatic rise in clearing and trading costs, and face challenging liquidity issues. Giancarlo expressed that he does not support user fees, as he is concerned with impairing liquidity and creating further costs.
Swap Data Reporting Requirements
DeLauro asked about swap data reporting requirements. Giancarlo reiterated his support for Title VII reform, including swap data reporting. He explained the issue is that the promise of data transparency has not been greater realized. He noted his plans for a road map for swap data reporting, and expressed enthusiasm for financial technology such as blockchain to get us closer to real time swap data analysis.
For more information on this hearing, please click here.