June 22, 2017

Senate Committee on Agriculture, Nutrition & Forestry: Hearing on Nomination of J. Christopher Giancarlo for Commodity Futures Trading Commission (CFTC) Chairmanship

 

Key Topics & Takeaways

  • Project KISS: Chairman Roberts lauded Giancarlo for launching an initiative to review CFTC rules and regulations to reduce regulatory burdens, and asked how he plans to carry this out further. Giancarlo explained that the Commission has regulations that may be in need of refreshing – whether due to being outdated, conflicting or overly burdensome. He explained that the CFTC’s Project KISS initiative will look at rules to see if they can be carried out in simpler ways.
  • Chairman Priorities: Giancarlo listed his three priorities should he be confirmed as Chairman: 1) foster open, transparent, competitive and durable derivatives markets that are free from fraud and manipulation; 2) conduct the Commission’s regulatory mission in support of broad-based economic growth and becoming a 21st century regulator; and 3) carry out the mission in a way that respects taxpayers and returns to regular operating order, as well as apply existing rules in a less burdensome way.
  • Position Limits: Stabenow asked if Giancarlo is committed to completing the “critical” position limits rule without further delay, to which he said “yes.” He continued that he voted for the most recent version of the rule and that the Commission is currently reading through the comments received, adding that he believes a position rule can get done.
  • Commissioner Vacancies: Ranking Member Stabenow mentioned Commissioner Bowen’s resignation announcement and stressed the need to confirm the four open Commissioner seats as soon as possible so the leadership team is complete.

 

Nominees

  • J. Christopher Giancarlo, Acting Chairman, Commodity Futures Trading Commission

 

Opening Statements

In his opening statement, Chairman Pat Roberts (R-Kan.) explained that the regulatory services the CFTC provides allow agriculture and other markets to rely on derivatives to hedge risk and “focus on what they do best.” He applauded Acting Chair Giancarlo for taking the CFTC’s mission to heart, and spoke of the unanimous committee vote he received during his Commissioner nomination process in 2014. Roberts stressed the need for a Commission that “handles regulations properly” and “reduces federal overreach.” He noted his encouragement for LabCFTC, which will foster FinTech innovation, stating that Giancarlo remains “ahead of the curve” in this regard.

 

In her opening statement, Ranking Member Debbie Stabenow (D-Mich.) stated her appreciation of Giancarlo’s bipartisan work while serving as a Commissioner and added that the CFTC Chairman has a “wide range of responsibilities” that impact everyone. She continued that although Wall Street reform has brought transparency to the swaps market, more needs to be done at the Commission to keep moving forward. Stabenow stated the critical need for the CFTC to finish rulemaking required by the Dodd-Frank Act – namely position limit and capital rulemakings – and criticized the “insufficient budget” proposal released by the President, adding that the Commission cannot do its work at the current funding level. Lastly, she mentioned Commissioner Sharon Bowen’s resignation announcement and stressed the need to confirm the four open Commissioner seats as soon as possible so the leadership team is complete.

 

Testimony

  1. Christopher Giancarlo, Acting Chairman, Commodity Futures Trading Commission (CFTC)

During Giancarlo’s testimony, he spoke of his 2014 Commissioner nomination hearing where he promised to learn about the agriculture sector, explaining that since then he has met with stakeholders in numerous states to understand what they do on a daily basis and how regulations impact them. He continued that farmers use futures to hedge prices, and that derivatives are also used for price stabilization when it comes to fuel and supporting mortgages, among other uses, which frees up capital for economic and job growth. Giancarlo restated his strong support of Title VII of the Dodd-Frank Act. He closed with his three priorities should he be confirmed as Chairman: 1) foster open, transparent, competitive and durable derivatives markets that are free from fraud and manipulation; 2) conduct the Commission’s regulatory mission in support of broad-based economic growth and becoming a 21st century regulator; and 3) carry out the mission in a way that respects taxpayers and returns to regular operating order, as well as apply existing rules in a less burdensome way.

 

Question & Answer

Reg Reform
Roberts lauded Giancarlo for launching an initiative to review CFTC rules and regulations to reduce regulatory burdens, and asked how he plans to carry this out. Giancarlo explained that the Commission has regulations that may be in need of refreshing – whether due to being outdated, conflicting or overly burdensome. He explained that the CFTC’s Project KISS initiative will look at rules to see if they can be carried out in simpler ways.

 

Stabenow asked how Project KISS and the recent Executive Order issued by President Trump, which in her view are aimed at “rolling back” Wall Street reforms, relate to each other. Giancarlo stressed that Project KISS is not meant to roll back Dodd-Frank or Wall Street reforms “in any shape or fashion,” and that it is simply an approach to see if the CFTC can carry out rules and regulations in a simpler way.

 

Sen. Kirsten Gillibrand (D-N.Y.) asked if President Trump or anyone in the Administration has identified CFTC regulations that they want to eliminate or re-write, to which Giancarlo replied “no.”

 

Position Limits
Stabenow asked Giancarlo if he is committed to completing the “critical” position limits rule without further delay, to which Giancarlo said “yes.” He continued that he voted for the most recent version of the rule and that the Commission is currently reading through the comments received, adding that he believes a position rule can get done.

 

CFTC Budget Request

Stabenow noted that Giancarlo put forward his own budget request that is $30 million higher than the Administration’s proposal, and asked what risks the Commission will face if the budget is not increased. Giancarlo replied that he will “work with whatever budget” he is given and ensure the mission is completed, but that there are new elements to his budget request that are necessary to keep up with the evolving markets.

 

Gillibrand stated that the CFTC’s budget is “far below” that of the prudential regulators, and asked if Congress should look at how other regulators use mandatory funding mechanisms as an potential tool for the CFTC would have a more reliable source of funding. Giancarlo explained that that conversation has been going on “for a long time,” but that the CFTC has self-funding in the markets and through their self-regulatory organization, the National Futures Association. He expressed concern with the liquidity impact of such an approach, noting that he met with treasurers of prominent corporations last week who raised their decreasing ability to access liquidity in the markets, and that he does not advocate for transaction fees given the trade-off of liquidity impact in the markets.

 

Cybersecurity

Stabenow asked what he will do to address cybersecurity at the Commission. Giancarlo stated that cyber risk “has to be the top priority” as it is the top threat to the markets the Commission oversees. He explained that the head of the Commission’s cybersecurity team meets with him on a monthly basis and that they work with U.S. and foreign regulatory agencies, as well as market participants, to address cyber risk.

 

Speculation and Pricing

Sen. Amy Klobuchar (D-Minn.) asked Giancarlo what he learned when meeting with members of the agriculture community and how the Commission can be responsive to their needs. Giancarlo replied that such end users use price signals that come from the markets for pricing, even if they do not use hedging products directly, and that it is goal of the CFTC to ensure the “give and take” of different market participants “result in a fair price.”

 

Klobuchar brought up the issue of high-frequency trading and the CFTC’s work on Regulation Automated Trading (Reg AT), and asked what other steps the Commission can take to ensure pricing is accurate. Giancarlo stated that the CFTC does not currently have the analytical tools to see if high-frequency trading is harmful or benign to the market, but noted that such traders do “provide important liquidity in the markets.” He noted his request for 12 additional economists in his budget request so the Commission can have sound analyses to determine their policy decisions, “based on hard data.”

 

Klobuchar then asked what steps the CFTC is making to prevent price hikes in the energy sector. Giancarlo stressed the need to “get position limits right,” and that it is necessary for the energy sector to have flexibility built into limits. He continued that position limits can be used to address excessive speculation, where appropriate.

 

Cross Border Rules
Gillibrand stated that pooled risk anywhere in the world can cause problems in the U.S. markets, and asked how often he hears from market participants about reforming U.S. person rules for U.S.-based entities.

 

Gillibrand further asked if he sees any issues with the U.S. persons rule as Brexit happens. Giancarlo replied that it is necessary to “take the view that risk builds up anywhere in the world can come back home,” and that he is in favor of a territorial approach – not, however, exporting a “mechanical” approach.

 

She then asked if he would rewrite the U.S. persons rule or take any action to dilute the CFTC’s jurisdiction, to which Giancarlo replied that there will be no such action to dilute the Commission’s jurisdiction. He noted, however, that Congress got the swaps execution rules right but that “we got it wrong” during the rulemaking process, and that it needs a rewrite, citing to his 2015 White Paper on the topic.

 

21st Century Glass-Steagall
Gillibrand asked if anyone in the Trump Administration has spoken to him about reinstating an updated version of Glass-Steagall, to which Giancarlo replied “no.” She then asked if there has been any thought about separating derivatives from commercial banking, which he replied that he is “not aware of any.”

 

For more information on this hearing, please click here.