July 27, 2017

Senate Committee on Agriculture, Nutrition & Forestry: Nomination Hearing

Key Topics & Takeaways

  • Position Limits and De Minimis Threshold: Committee Chairman Pat Roberts (R-Kan.) asked the nominees for their views on the de minimis level and the position limits rule. Commodity Futures Trading Commission (CFTC) Nominee Rostin Behnam stated his support for a “quick” and “thoughtful” completion of the position limits rule, and stressed the need to finalize and implement a “proper bona fide hedge definition.” He continued that he supports the current de minimis rule and committed to working to ensure the rule contains the most “recent and relevant data.” Nominee Brian Quintenz stressed the need for the CFTC to analyze the set of data for the de minimis threshold and stated it is “imperative” that end-users will be able to continue hedging with the position limits rule. Nominee Dawn Stump commended CFTC Chair Giancarlo’s commitment to finalizing the position limits rule. She then explained that the CFTC has delayed implementing the de minimis threshold until it can obtain better data, and that she looks forward to reviewing the data, if confirmed.
  • Project KISS: Sen. John Boozman (R-Ark.) asked how to eliminate redundant regulations, to which Quintenz pointed to Giancarlo’s Project KISS that will find areas of duplicative rules and regulations, and Behnam and Stump both noted their support for the review.
  • International Coordination: Boozman asked the nominees what the biggest harmonization challenges are for swaps rules when it comes to ensuring U.S. firms operate on a level playing field with their international competitors. Quintenz explained the need to ensure risk is not imported to the U.S. through “lax regulations.” Behnam stressed the need for the CFTC to have appropriate oversight over cross-border transactions and pledged to work with Giancarlo and foreign regulators to create a level playing field. Stump echoed the other responses and added that global regulators must coordinate so they “do not step on each other.”

Nominees

  • Rostin Behnam, to be a Commissioner of the Commodity Futures Trading Commission
  • Brian Quintenz, to be a Commissioner of the Commodity Futures Trading Commission
  • Dawn Stump, to be a Commissioner of the Commodity Futures Trading Commission

Opening Statements

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

In his opening statement, Roberts lauded the Commodity Futures Trading Commission (CFTC) for fostering open, transparent, and financially sound markets, as well as protecting stakeholders and end-users from “fraud and abusive practices related to derivatives.” He stressed that while farmers, ranchers, and other end-users did not contribute to the financial crisis, they are the ones “shouldering the heaviest burdens” from regulations.

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

In her opening statement, Stabenow cautioned the nominees that, if confirmed, their decisions will impact the nation’s economic health, then described the “devastating impacts” of the financial crisis and how the Dodd-Frank Act brought transparency to the market. However, she cautioned that there is “still much work to be done.” Stabenow explained that the CFTC must “quickly” finalize rules such as position limits and capital requirements for swap dealers to ensure the markets are not at risk.

Testimony

Rostin Behnam, to be a Commissioner of the Commodity Futures Trading Commission

In his testimony, Behnam described his professional experience and what he will bring to the CFTC if confirmed. He described the “significant changes” to the CFTC’s “regulatory canvas,” including the expansion of its mandate to regulate the swaps market, and lauded Title VII of the Dodd-Frank Act for improving transparency in these markets. Behnam committed to working with the Senate Agriculture Committee, as well as his fellow nominees and CFTC Acting Chair Giancarlo, to complete Title VII “in its entirety in a thoughtful and expeditious manner.”

Brian Quintenz, to be a Commissioner of the Commodity Futures Trading Commission

In his testimony, Quintenz discussed his background, to include coming from a family of small business owners and entrepreneurs, and explained his familiarity with the recordkeeping and disclosure requirements of the CFTC. He stressed that he is a “firm believer in data and transparency,” and that he will ensure that regulations and burdens are “tied to the risks being mitigated,” adding that it is a “crucial time” for the financial markets and those who depend on them.

Dawn Stump, to be a Commissioner of the Commodity Futures Trading Commission

In her testimony, Stump spoke about her professional background and stressed the need for well-functioning agriculture markets. She explained how she has seen the variety of effective risk management and price discovery tools available, as well as how devastating natural events like droughts can be to the markets, noting that futures, options, and swaps are important in managing risk. Stump sympathized with the concerns of end-users that use derivatives to hedge risk, and warned that regulators must respond to ever-changing markets, as the speed of change will continue.

Question & Answer

Position Limits and De Minimis Threshold
Roberts asked the nominees for their views on the de minimis level and defining a bona fide hedge. Behnam stated his support for a “quick” and “thoughtful” completion of the position limits rule, and stressed the need to finalize and implement a “proper bona fide hedge definition.” He continued that he supports the current de minimis rule and committed to working to ensure the rule contains the most “recent and relevant data.” Quintenz stressed the need for the CFTC to analyze the set of data for the de minimis threshold and stated it is “imperative” that end-users who hedge in markets will be able to continue with the position limits rule. Stump commended Giancarlo’s commitment to finalizing the position limits rule. She then explained that the CFTC has delayed implementing the de minimis threshold until they can obtain better data, and that she looks forward to reviewing the data, if confirmed.

Sen. Joe Donnelly (D-Ind.) noted that he is “constantly arguing that the position limits should be a tool in the CFTC’s toolbox,” and asked if the nominees will work on finishing the rule, to which they all agreed. Stabenow also asked for their commitment to finalizing the rule.

CFTC’s Budget
Stabenow criticized President Trump’s budget proposal for the CFTC and asked the nominees if they support Giancarlo’s efforts to increase the budget. Behnam cautioned that the CFTC budget increases post-financial crisis has not been commensurate with the Commission’s oversight responsibilities, and noted his support for Giancarlo’s proposal. Quintenz added that Giancarlo’s increased budget would go towards hiring additional economists and having more oversight over central counterparties. Stump noted that Giancarlo’s top-to-bottom review of resources was “overdue” and stated her desire to be part of future budget conversations if confirmed.

Donnelly noted the difficulty of appropriately funding the CFTC and asked for the nominees’ commitment to offering ideas on how to fund the Commission going forward, to which they all agreed.

 

Sen. John Thune (R-S.D.) stated that he has been told resources at the CFTC are “insufficient” to meet operations and oversight, and asked the nominees if they plan to request additional resources. Stump replied that Giancarlo has done a “remarkable job of evaluating the resource needs” of the Commission and what gaps need to be filled, and both Quintenz and Behnam agreed.

Cybersecurity
Stabenow stressed that a cyber-attack would have “catastrophic repercussions” for the financial markets, and asked the nominees how they will address the challenge. Behnam stated that coordination and collaboration among regulators is essential, and that Giancarlo’s position on the Financial Stability Oversight Council (FSOC) is an opportunity to coordinate with other regulators. Quintenz and Stump echoed Behnam’s response.

Regulatory Burden
Sen. Joni Ernst (R-Iowa) asked the nominees how to avoid one-size fits-all regulations for different stakeholders and end-users. Stump explained the difference between asset classes and market participants and how the CFTC must respond to each in different ways. Quintenz cautioned that when the Commission “loses sight of the risk of rules they are trying to mitigate or market flaws that regulations are trying to address, that is when costs get added” and the regulations burden ordinary businesses. Behnam echoed Stump and Quintenz, adding that he will be in “constant communication” with stakeholders to ensure they are able to use the derivatives markets “in a cost-effective way to manage risk.”

Ernst then asked if CFTC regulations treat low-risk behavior the same as high-risk. Quintenz replied that the de minimis threshold is an example of a rule where thresholds or definitions do not fit the regulation or risk being mitigated, to which Stump agreed. Behnam stressed the importance of the CFTC having the flexibility to adapt to the markets.

Sen. John Boozman (R-Ark.) asked how to eliminate redundant regulations, to which Quintenz pointed to Giancarlo’s Project KISS that will find areas of duplicative rules and regulations, and Behnam and Stump both noted their support for the review.

International Coordination
Boozman asked the nominees what the biggest harmonization challenges are for swaps rules when it comes to ensuring U.S. firms operate on a level playing field with their international competitors. Quintenz explained the need to ensure risk is not imported to the U.S. through “lax regulations.” Behnam stressed the need for the CFTC to have appropriate oversight over cross-border transactions and that he will work with Giancarlo and foreign regulators to create a level playing field. Stump echoed the other responses and added that global regulators must coordinate so they “do not step on each other.”

Sen. David Perdue (R-Ga.) asked how the CFTC can better coordinate with global regulators to ensure a “robust” global swaps market. Stump replied that coordination is “essential,” and that while global regulators may have moved at different speeds post-Dodd-Frank, there have been fewer gaps in recent years. Quintenz explained that the CFTC needs to understand how regulatory costs impact the global marketplace, and that the Commission needs to look from an “outcomes-based” process. Behnam agreed with the others, adding that global regulators can use the Basel Committee and International Organization of Securities Commissions (IOSCO) to work together on creating a level playing field.

Source Codes
Perdue asked if the CFTC is capable of “collecting, protecting, and using” source codes properly in algorithmic trades. Quintenz replied that the CFTC has issued subpoenas for source codes in the past, and that it is “important protection for that intellectual property.”

LabCFTC
Sen. Steve Daines (R-Mon.) asked if the nominees support the LabCFTC initiative, to which Stump replied “absolutely.” She added that regulators must be forward-looking when it comes to regulations, and stated her commitment to helping LabCFTC if confirmed, adding that “it could evolve to much bigger than what it is today.”

For more information on this hearing, please click here.