February 15, 2018

Senate Agriculture, Nutrition and Forestry Committee “State of the CFTC: Examining Pending Rules, Cryptocurrency Regulation and Cross Border Agreements”

Key Topics & Takeaways

• CFTC User Fees: Committee Chair Pat Roberts (R-Kan.) stated that he does not support imposing Commodity Future Trading Commission (CFTC) user fees, describing them as “a tax on farmers and ranchers.”
• Clearinghouses: CFTC Chairman Christopher Giancarlo expressed that while the European Union (EU) considers new legislation that would create a new framework for EU central counterparty (CCP) regulation and supervision, the CFTC is seeking assurances that U.S. clearinghouses would not be treated differently than they are now.
• Position Limits: On the finalization of the position limits rulemaking, Giancarlo explained that Commission staff is working on this issue and that he hopes to have something to present to the Commission in the second half of the year.  He said, however, that given the fact that it is such a complicated rulemaking, he is hopeful that the final rule can be considered by a full Commission.
• Blockchain: Giancarlo noted that blockchain technology is being used across many different industries, including agriculture, transportation and logistics.  He cautioned, however, that regulators will need to stay ahead of the curve of this technology moving forward. 

Witness 

• J. Christopher Giancarlo, Chairman, CFTC 

Opening Statements

Sen. Pat Roberts (R-Kan.), Committee Chairman

Roberts opened the hearing stating that he was impressed with Chairman Giancarlo’s leadership, and that he was interested in discussing some of the pressing issues facing the Commission today, including oversight of cryptocurrencies, cross-border agreements and end-user issues.  Specifically, regarding cryptocurrency, Roberts expressed that oversight is a key issue as both financial institutions and retail investors are very focused on the area.  He stated that it is important for regulators to provide consumer protections, but also to not stifle innovation.  Roberts then stated his belief that blockchain and distributed ledger technology (DLT) can offer significant benefits, and that he is pleased to see the CFTC active in this space.

Roberts then stated that he would like to see the nomination of Dawn Stump for the role of CFTC Commissioner moved forward, and that he would like to see the Commission fill its other vacant Commissioner spots as soon as possible. Roberts asked Giancarlo what the CFTC’s funding request was.  Giancarlo explained that the CFTC requested $281.5 million, which was the amount included in President Trump’s budget plan.  He noted, however, that $31.5 million of this would be secured by the imposition of user fees as part of that plan.  Roberts stated that he does not support user fees, describing them as “a tax on farmers and ranchers.”

Sen. Debbie Stabenow (D-Mich.), Committee Ranking Member

Stabenow highlighted the importance of the futures and swaps markets to the strength and resiliency of markets, such as protecting end-users from price fluctuations, creating jobs and promoting economic stability.  She then said it is the CFTC’s job to maintain transparency and prevent fraud in these markets, which they have done via modernized surveillance and enforcement actions.  She expressed concern, however, that rules regarding position limits and swap dealer capital are not yet finalized. Stabenow stated that it is important for the CFTC to receive the appropriate funding and access to resources it needs to do its job.

Testimony

CFTC Chairman J. Christopher Giancarlo

In his testimony, CFTC Chairman Giancarlo opened by explaining that the CFTC’s priority is to foster transparent markets, prevent fraud and manipulation and encourage growth.  He went on to highlight the key role American agricultural producers play in the world, and the importance of ensuring a well-functioning derivatives market to support them.

Giancarlo thanked Roberts and Stabenow for their letter supporting the CFTC’s approach to the cross-border supervision of CCPs and its ongoing discussions with the EU in this space.  He expressed that while EU considers new legislation that would create a new framework for EU CCP regulation and supervision, the CFTC is seeking assurances that U.S. clearinghouses would not be treated differently than they are now.  Giancarlo went on to state that, “[d]eference continues to be the right approach to ensure that oversight over these global markets is effective and robust without fragmenting markets and trading activity” and that he continues “to press upon my European counterparts that the proposed legislation must preserve the tenants of our 2016 equivalence agreement.”

Question & Answer

Blockchain and DLT
Roberts asked what the potential benefits of blockchain and DLT outside of Bitcoin might be.  Giancarlo responded that blockchain technology is being used across many different industries, including agriculture, transportation and logistics.  He cautioned, however, that regulators will need to stay ahead of the curve of this technology moving forward, as there is a decentralization of information which central authorities have traditionally relied upon.

Cross-Border Agreements

Roberts next asked for an update on where discussions on CCP supervision and other equivalency agreements with the EU stand.  Giancarlo again thanked the Chairman and Ranking Member for their letter of support on the issue, and stressed that American markets must be overseen by U.S. law and regulators, under the direction of U.S. Congress.

When further questioned on the impact of changes to the current EU CCP agreement, Giancarlo explained that he is very concerned over the prospect of a foreign regulator seeking to come into a U.S. regulated environment and conduct their own independent oversight.

CFTC Oversight and Surveillance

Stabenow asked for an update on Bitcoin Futures surveillance, and whether the CFTC has the necessary resources moving forward.  Giancarlo noted that while the Commission has requested additional surveillance funds, they have not seen margin breaches since the launch of Bitcoin Futures products.  He went on to express confidence in the regulatory system in place for futures, but did note that the underlying market is outside the scope of CFTC jurisdiction, and that regulatory oversight of that requires further policy discussion and considerations.

Stabenow next asked whether the CFTC has the resources necessary to ensure proper oversight.  Giancarlo explained that oversight is always a priority, and pointed out that he moved the Commission’s surveillance branch into the enforcement branch, to prevent any lag.  He did note, however, that further staffing is necessary in areas across the agency.

Reg. Reform 2.0

Stabenow noted that while Giancarlo has been a proponent of reviewing current regulations, or “Reg. Reform 2.0,” she is concerned with some key “Reg. Reform 1.0” reforms not being finalized.  Giancarlo first explained that “Reg. Reform 2.0” is not meant to weaken any regulatory safeguards already implemented. On rules regarding the swap dealer de minimis threshold, Giancarlo explained that the Commission is currently working through data and will seek to address further in the near term.  In regards to the position limits rulemaking, Giancarlo explained that Commission staff is working on this issue and that he hopes to have something to present to the Commission in the second half of the year.  He said, however, that given the fact that it is such a complicated rulemaking, he is hopeful that the final rule can be considered by a full Commission.

Sen. Tina Smith (D-Minn.) asked whether changes to Title VII reforms could increase risk of a financial crisis, and how the CFTC considers the potential impact of such changes.  Giancarlo explained that the CFTC has embraced Title VII reforms, but that not every element of the reforms works as well as it should or how they were meant to.  Giancarlo went on to say that markets change and evolve, so regulators should make sure rules evolve as well. In terms of considering impacts, Giancarlo stated that the Commission keeps in close contact with market participants, and the goal of creating the market intelligence branch is to make sure the CFTC is able to keep up with evolving markets and stay ahead of the curve.

Cybersecurity

When queried on what the CFTC is doing in the cybersecurity space, Giancarlo said this has been a key area of focus.  He explained that he meets monthly with the Commission’s chief cyber officer, and has further implemented agency wide cyber drills.

CFTC Budget

Smith asked whether the CFTC can secure necessary resources, and whether that could occur absent user fees.  Giancarlo explained that he utilized a “zero-based budgeting process” to reach the Commission’s $281.5 million request, to ensure this was based on real needs.

Cryptocurrency

When questioned as to how a multi-agency approach might work in oversight and regulation of cryptocurrencies, Giancarlo explained that it is a very challenging area, as no one regulator has sole oversight or standard setting responsibility.  He noted however, that the CFTC is still able to enforce against fraud or manipulation; however, they must have workable data to detect such activity.

Enforcement

Sen. Sherrod Brown (D-Ohio) expressed concern that the CFTC’s overall number of enforcement actions are down, and whether this signals a lack of focus in this space.  Giancarlo pointed to several significant enforcement actions, as well as coordination with the Department of Justice and Federal Bureau of Investigation in some instances.  He stated these efforts are meant to send the message that the CFTC is serious about enforcement.

Technology Innovation

Sen. Steve Daines (R-Mont.) asked how the CFTC approaches fostering innovation while protecting markets.  Giancarlo explained the use of new technologies and cryptocurrency for illicit purposes is always a concern, and noted that he has met with FinCEN, who ensures anti-money laundering procedures are all in place for domestic virtual currency trading platforms.

Giancarlo then highlighted the efforts of LabCFTC to serve as the agencies focal point for tracking and learning about new innovations that are transforming markets.  He pointed out that LabCFTC has held open office hours in New York, Chicago and Silicon Valley, to meet with stakeholders on the ground. 

Project KISS

Sen. John Boozman (R-Ark.) asked for an update on Project KISS.  Giancarlo highlighted that Project KISS is a “policy neutral” exercise that is about simplifying rules to make them less costly, complex or burdensome.  He explained that complicated rules make it more difficult for smaller firms to participate in markets, given associated costs.

For more information on this hearing, please click here.